Investing in real estate can be incredibly rewarding, but it’s not without its complexities. One of the most accessible and potentially profitable ways to invest in real estate is through syndications. As an experienced real estate investor, I’ve seen firsthand the benefits and challenges that come with these investment vehicles.
Here, we’ll cover the different types of real estate syndication offerings.
Real Estate Syndications as Securities
Syndication allows people to pool resources to invest in a particular asset that they typically could not otherwise do individually. Syndications are commonly used to purchase a lot of high-priced items—sports teams, racehorses, art, and most notably, larger real estate assets, specifically commercial properties.
These syndications are typically structured as securities, subject to federal and state securities laws. Understanding this structure is crucial for any investor considering syndication.
Key features
- Pooling resources: Multiple investors come together to invest in a single property.
- Passive investment: Investors are typically passive, meaning they do not manage the property. These folks are called limited partners (LPs), as their liability is generally limited to the amount they invested, and their role is typically limited to providing the necessary capital to acquire and renovate the asset.
- Sponsorship: A sponsor or syndicator manages the property and investment, making decisions on behalf of the group. The sponsor can also be called a key principal (KP), or if there are multiple folks, principals. Another common term for this group is general partners, or GPs.
- Returns: Investors receive a share of the profits, which can come from operating cash flow, property appreciation, or both.
Investor eligibility and minimum investment
- Accredited vs. non-accredited investors: Eligibility often depends on whether you are an accredited investor, which is someone who meets certain income or net worth thresholds. Entities can also qualify as accredited; however, they must meet different criteria. The accredited investor definition from the SEC can be found here.
- Minimum investment: These can vary widely, but typically range from $25,000 to $100,000.
Regulatory compliance
Syndications must comply with securities regulations, but are not typically registered as publicly traded securities. Instead, they rely on specific exemptions from registration, such as Regulation D of the Securities Act of 1933.
Pros and cons
Syndications have both benefits and challenges. Here are some of the major draws and drawbacks of real estate syndication.
Pros:
- Access to larger properties
- Professional management
- Potential for high returns
- Ability to diversify your investment dollars among several properties/sponsors/markets
Cons:
- Sponsor (GP) risk
- Less control over the investment
- Regulatory complexity
- Illiquidity
Other considerations
Investors should consider the sponsor’s experience, the asset’s local market, the property’s potential, the global market, and their own risk tolerance.
Regulation D Offerings
Regulation D (Reg D) offerings are a common way for real estate syndications to raise capital. They provide exemptions from SEC registration, making it easier to offer securities to investors while still complying with the law. Registering as a public offering would otherwise be cost-prohibitive for investment ventures of the size typically found in real estate syndications.
Key features
- Exemptions: Reg D offers several exemptions that allow for raising capital without the full registration process. The two most commonly used exemptions in real estate syndication are rules 506(b) and 506(c). The primary difference between these two rules is rule 506(c) allows the sponsor to advertise the offering, and rule 506(b) does not (these are “word-of-mouth” offerings).
- Accredited investors: In exchange for the ability to advertise the offering, syndications that use rule 506(c) are restricted to accredited investors only. Rule 506(b) syndications may be allowed to accept a limited number of non-accredited investors.
Investor eligibility and minimum investment
Eligibility requirements and minimum investments are set by the syndicator and can vary. Syndicators can also allow exceptions to the minimum investment dollar amount, so it is best to check directly with the respective sponsorship group.
Regulatory compliance
While Reg D offerings are exempt from full SEC registration, they still require filing Form D and adherence to specific rules to maintain their exemption status.
Pros and cons
Pros:
- Simplified regulatory process
- Less costly for the venture than registering as a public offering
Cons:
- Limited advertising and general solicitation (depending on the exemption used)—for example, when it comes to 506(b) offerings.
- Inability to sell shares on the public markets
Other considerations
It is best to consult with a real estate-focused CPA and/or your financial advisor for additional advice concerning your financial situation.
Rule 506(b) Offerings
Rule 506(b) is one of the most popular exemptions under Regulation D, allowing issuers to raise an unlimited amount of money from accredited investors, as well as up to 35 non-accredited investors who meet certain sophistication requirements.
Key features
- No general solicitation: Advertising and public solicitation are not allowed. In fact, sponsorship teams must be able to prove the investor was not introduced to the investment through a general solicitation. This hurdle is often overcome by showing that the investor had a preexisting relationship with the sponsor.
- Investor limits: Up to 35 non-accredited but sophisticated investors can participate.
Investor eligibility and minimum investment
- Accredited investors: Primarily targets accredited investors.
- Non-accredited investors: Up to 35 sophisticated non-accredited investors.
Regulatory compliance
Must file Form D with the SEC and comply with state securities laws.
Pros and cons
Pros:
- Ability to include non-accredited investors
- No limit on the amount raised
Cons:
- No public advertising or general solicitation
- Must verify investor sophistication for non-accredited investors
Other considerations
Sponsors must ensure they do not publicly advertise the offering, which can limit marketing strategies.
Rule 506(c) Offerings
Rule 506(c) is another exemption under Regulation D, which allows general solicitation and advertising, provided that all investors are accredited and the issuer takes reasonable steps to verify that they are accredited.
Key features
- General solicitation: Advertising and public solicitation are allowed.
- Accredited investors only: All investors must be accredited.
Investor eligibility and minimum investment
Only accredited investors are eligible.
Regulatory compliance
Requires verification of investor accreditation and filing Form D with the SEC.
Pros and cons
Pros:
- Allows public advertising
- Unlimited capital raising
Cons:
- Must verify all investors are accredited
- Excludes non-accredited investors
Other considerations
The ability to advertise broadly can significantly expand the pool of potential investors, but also requires rigorous verification of investor credentials.
Comparing Different Syndication Offerings
Accessibility for different investor types
- 506(b): Allows up to 35 non-accredited investors.
- 506(c): Only accredited investors are allowed.
Minimum investment requirements
These vary by offering, but generally range from $25,000 to $100,000.
Liquidity
Real estate syndications are typically illiquid investments, meaning your money is tied up for the duration of the investment period.
Diversification potential
Syndications can provide diversification within a real estate portfolio, allowing investors to participate in larger, potentially more stable projects.
Regulatory compliance
Each type of offering has specific regulatory requirements that must be adhered to, impacting both the sponsor and the investor.
| Feature | Rule 506(b) | Rule 506(c) |
| General solicitation | No | Yes |
| Investor type | Accredited and up to 35 non-accredited | Accredited only |
| Verification | Self-certification for accredited | Issuer must verify accreditation |
| Regulatory compliance | File Form D, no advertising | File Form D, advertising allowed |
How to Choose the Right Offering for You
Choosing the right syndication offering depends on several factors, including your investor status (accredited or non-accredited), your comfort with the regulatory environment, the minimum investment requirement, and your overall investment goals.
Here are some steps to help you decide:
- Assess your investor status: Determine if you are an accredited investor or if you meet the sophistication requirements for non-accredited investors in a 506(b) offering.
- Consider your investment goals: What are you hoping to achieve with this investment—cash flow, appreciation, tax advantages, diversification?
- Consider your risk tolerance: Does the investment, strategy, property, sponsor, and financing structure align with your risk tolerance?
- Evaluate the sponsor: Look at the track record and experience of the syndicator.
- Understand the local market: Research the property market where the investment is located.
- Understand the national market: Depending on the asset, performance varies by market cycle. Research how the asset you want to invest in performs in different market cycles to see if the current or upcoming cycle will impact your investment positively or negatively.
- Review the terms: Carefully read the offering documents to understand the terms and conditions. It is very common for investors to seek the advice of their real estate-focused CPAs and/or financial advisors when it comes to investment decisions.
Final Thoughts
Real estate syndications offer a powerful way to invest in larger, more lucrative properties, with professional management and potentially higher returns. However, understanding the different types of offerings and their regulatory implications is crucial to making informed investment decisions.
Whether you’re an accredited investor looking to leverage the flexibility of a 506(c) offering or a non-accredited investor seeking opportunities through a 506(b) offering, there are options available to fit your investment needs. Always conduct thorough due diligence, and consult with your real estate-focused CPAs and/or financial advisors to ensure your investment choices align with your overall financial strategy.