Real Estate Investment Syndication sounds like a strategy that only experienced or advanced real estate professionals would participate in, but besides the scary words, real estate investment syndication is a good way for accredited or sophisticated investors to tiptoe into larger investments in a smaller way. Now what does all of that mean? First, we need to define what an accredited investor is and what a sophisticated investor is. Under the securities laws of the Securities and Exchange Commission, Rule 501 of Regulation D, an accredited investor is someone who has a net worth of $1,000,000 or has income of $200,000 per year in each of the last two years, or $300,000 with a spouse and a reasonable expectation that he/she/they will have similar incomes in the current year. As Americans have grown their incomes and networths, more Americans have moved into the category of an accredited investor. It is not required by the SEC for the Syndication Manager to verify the legitimacy of an accredited investor, except that the Investor must fill out a standard form indicating he/she/they are an accredited investor. A sophisticated investor is possess enough knowledge and experience in finance and business matters to evaluate the risks and merits of the investment, or be able to bear the investment’s economic risk.
As a way for an accredited investor to participate in an investment, the offering firm, such as Triumph Capital Partners, must have a PPM (Private Placement Memorandum) filed with the SEC, and the investor must be given a copy of the agreement. The PPM would give the investor information about the potential investment, an operating agreement of the entity, and some idea of what to expect in the investment. No guaranteed rates of returns are published, and many warnings of potential risks of loss are given, to alert the investor that there is risk involved in the investment. The investor would then, after evaluating the potential risks and returns, if interested, fill out the Subscription Agreement, and return it to the Investment Manager at the firm offering the PPM. If accepted into the syndication, the investor would be given the opportunity to determine his level of financial commitment. In general, the PPM’s are written for a fixed dollar amount of a share, for example, a share could be $20,000 or $50,000 or even higher or lower. It is determined by the PPM. An investor could then determine how many shares he might want to invest in. The money is sent or wire transferred into an escrow account, set up for the PPM.
Once a sufficient amount of shares are gathered, the investment is made, and the investor is part of the investment based upon his pro-rata share. For example, an investor who made a $50,000 investment based upon a $50,000 per share price, would own 5% of a $1,000,000 investment. Typically, in syndication, the investor is not able to make any decisions once he is invested, but is informed of a routine basis of the status of the investment.
Syndication gives the investor a way to become an investor on larger properties, and in general, is able to gather larger returns on a larger property, spread risk out more, and gain experience in investing in commercial property.