Real Estate Chronicle

The real estate investment market is becoming more and more complex and, as a result, the traditional boundaries between different investment activities are changing. If someone is interested in buying or selling an interest in land, he generally seeks help from a real estate expert. If someone wants to buy or sell a common stock, he seeks the services of a securities expert. During the past decade there has been a growth of new forms of investment vehicles, the most common of which are known as ‘syndicates’. Syndicates are used in conjunction with many types of assets including real estate, R & D, purchase and management of hotels and motels, oil and gas exploration, livestock and agricultural development to name a few. Specifically as it refers to real estate syndicates, in its simplest definition this term is applied to any form of organization which allows two or more investors to participate in the ownership of an interest in real estate.

In the syndicate, the real estate asset is divided into two or more ‘investment units’ which are acquired by the individual investors. It is important to realize that the investment unit refers to the particular asset that is acquired by the investors, and not the underlying real property itself. The precise nature of the investment unit will depend on the form of the syndicate. In essence, investment units represent a fractionalized ownership of one or more interests in real property rather than direct ownership of an entire interest. While real estate syndicates are formed for a variety of reasons, the typical reason is to create a tax shelter. At the base of the syndicate is the relationship among investors. In all real estate syndicates there is some form of contract specifying the relationship intercurring between the individual investors and the underlying interest in real property.

Despite the multitude of forms, the structure of a real estate syndicate is invariably based upon one of the following six legal relationships: co-ownership, divided ownership, corporation, trust, general partnership and limited partnership. In addition, there are three central participants, or sets of participants, as follows:

[ ] the syndicator or promoter who creates the syndicate in the first place;

[ ] the syndicate manager who manages the syndication and who, often times, is the promoter as well;

[ ] the investors who purchase the investment units.

Moreover, a number of other experts are used that are unrelated to the syndication, such as managers, appraisers, builders, leasing agents and mortgage lenders. In some cases the syndicator may buy the property before creating the syndicate organization. In other cases, the syndicate investment units may be marketed before the real property is acquired.

The allocation of profits and expenses is typical of the real estate industry. For instance, there are ‘front-end’ fees to cover initial expenses for the formation of the syndicate such as:

[ ] mark-up profit on lands sold to the syndicate by the syndicator, if he advanced the initial capital to purchase real estate.

[ ] Real estate commissions on sales to the syndicate by the syndicator.

[ ] Percentage of the initial funds raised by the syndicator.

[ ] Fees for services rendered.

[ ] Fees for guarantees, such as cash-flow guarantees or construction guarantees.

As to the return and liquidity, each investor is entitled to the proportionate share of all leases, rents, resale of the syndicate interests in land and, of course, each investor will have to consider different tax shelter possibilities offered by the six different legal organizations of syndicates. Last but not least, liquidity is an essential factor from an investors perspective, in that investors may want to transfer investment units or portion thereof to someone else at a later date.

There are at times situations wherein a direct ownership in land is neither beneficial nor convenient, and an indirect ownership by way of investment units may be more appropriate. Likewise, as it is the case more and more with large hotel consortiums, original capitalization is done by selling ‘interest shares’ – the equivalent of investment units – to private investors, with the balance of the initial funding obtained by institutional lenders and secured by the real property. Nowadays syndicators have gone as far as raising money in the stock market by selling futures stocks of edifications to come, typically large high-rise and residential towers that cluster the downtown core of practically every metropolis in North America.

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