A Complete Guide To Modern Real Estate Syndication
The centuries-old practice of real estate syndication is being modernized by the power of technology. Often referred to as real estate crowdfunding, this modern update on real estate syndication is putting institutional quality real estate deals at the fingertips of today’s investors.
What is Syndication?
A real estate syndicate is a group of investors who pool their capital to buy or build property. Combined, individuals and companies have more buying power than what they could easily manage on their own. Syndicates are commonly structured as special purpose entities, such as limited partnerships (“LPs”) or limited liability companies (“LLCs”). Despite the legal form it takes, a special purpose entity is the method by which investors purchase the real estate, such as an apartment complex, office building, or even a portfolio or property fund.
The History of Real Estate Syndication
The practice of teaming up to acquire real estate has a long history that goes back hundreds of years, but for most of the 20th Century it has been relatively clandestine. It used to be that real estate entrepreneurs (now known as “sponsors”) could advertise their investment ideas to anyone; the term of art for this practice today is “public solicitation”. However, the Securities Act of 1933 required all new securities offerings to be registered with the Securities Exchange Commission (“SEC’) so that the federal body could provide oversight and protect investors from fraud. Of course, registering each offering and jumping through the necessary hoops made syndication far less efficient.
Luckily, though, the SEC promulgated “safe harbor” rules that allowed for sponsors to avoid registration under certain conditions. However, the safe harbors did not allow for public solicitation. Therefore, sponsors had two choices: 1.) raise money without public solicitation and avoid registration, or 2.) register the securities with the SEC, wait for approval, and then solicit investments from the public. The prior is almost always more efficient for sponsors, and therefore they almost always choose private syndication.
Although the Securities Act of 1933 effectively stopped public solicitation, private syndication continued. Such deals forced syndicators to gather capital from their own private “black book” of moneyed sources that often included members of the country club set, family trusts and working professionals, among others. Those real estate syndications were put together quietly and relied heavily on personal connections or brokers.
One notable example of the power of syndication dates back to the early 1960s when a group came together to acquire the Empire State Building in New York City. Syndicators reportedly sold about 3,300 ownership shares at $10,000 each to own a piece of the prestigious 102-story building, which at the time was one of the tallest buildings in the world.
Why syndicate real estate online?
These days, real estate crowdfunding firms are writing a new chapter in the evolution of real estate syndications. The Jumpstart Our Business Startups (“JOBS”) Act of 2012 directed the SEC to allow public solicitation without registration so long as all purchasers are accredited, Rule 506(c). The JOBS Act is widely credited with launching the real estate crowdfunding industry and making investing in commercial real estate much easier.
Crowdfunding platforms are leveraging online technology to create a new, efficient place for real estate syndication that bridges the gap between syndicators and a much larger pool of investors. Because they can reach a wider audience, sponsors have a tool that enables them raise capital more quickly and efficiently manage and grow those new relationships. Also, individuals can now easily identify and invest in real estate opportunities anywhere in the country via the online crowdfunding marketplace. Real estate investing via syndications is an established practice with a long track record of delivering results to both sides – syndicators and investors. Crowdfunding firms are simply layering technology on top of that practice to create a new online platform that makes real estate syndication transparent, efficient and scalable for the first time in its history. Online real estate syndication has the potential to launch a new era of real estate investing. That is already evident in a crowdfunding investor that has experienced explosive growth in just a few years with even more growth ahead.
Yearly U.S. CRE Transaction Volume
source: real capital analytics
Online Vs. Offline Syndication
Investors who participate in online syndication are not fundamentally different than those who are in a sponsor’s address book, except in two critical ways: they may be located anywhere in the U.S., and they can be reached online.
Rather than painstakingly finding and vetting individuals through personal connections, firms can immediately solicit accredited investors on an online marketplace. Instead of managing relationships and sensitive data through spreadsheets, firms can now track, communicate with, and scale their networks with automated investor management tools.
Many leading platforms operationalize much of the investor acquisition and verification workflow, from packaging the deal to generating documents and collecting signatures. While automation reduces overhead associated with the unnecessary back-and-forth, investors who need a personal touch or have additional questions covered by a listing are still only an email or phone call away.
CrowdStreet’s private-label investment management software is a service (SaaS) solution that allows sponsors to offer crowdfunded real estate fundraising and investor management capabilities on their own branded websites. The platform uses the same technology that powers the CrowdStreet marketplace, which gives investors access to the same online investing tools as one of the top crowdfunding platforms in the country. Investors can view deal information, complete offer transactions, receive post-funding updates, and track investment performance.
Sponsors can take advantage of the efficiencies of the crowdfunding marketplace, and yet still keep that fundraising “in-house,” so to speak, on their own branded websites. Veteran sponsors in particular already have established relationships with a core group of high-net worth and institutional investors that they have worked with in the past. Many sponsors view the portal as another tool to better serve that investor group, while simultaneously leveraging the portal to cultivate new relationships.
Ultimately, CrowdStreet allows sponsors to leverage the efficiencies of the technology without losing control of their own private pool of investors. That private and confidential investor data remains firmly in the hands of the sponsor. At the same time, the online portal provides a more efficient means of sharing information, conducting transactions and managing investments that today’s investors expect and demand. In addition, the portal assists sponsors capture the capital that is ready and waiting to invest in real estate today.
Don’t leave those dollars sitting on the table. Contact CrowdStreet today to learn more about how its investment software can help you raise funds, streamline your transactions, and foster lasting relationships with your investment community.
The Real Deal: An Insider’s Guide to Real Estate Investment & Syndication
New York Times: Real Estate Investment & Syndication
National Real Estate Investor: The Real Story Behind Getting Investors to Fund Your Syndication