Updated: Feb 26
Here is an overview of how a syndication works.
The Sponsor, also called General Partner or Managing Member, offers Investors to be Members, also called Limited Partners, in a commercial real estate multifamily property. The Sponsor is usually a group of entrepreneurs and with the experience and financial strength to meet lender requirements.
Investors bring most of the funding for the acquisition down payment, repairs and closing costs.
The Sponsor finds the property, analyzes it, structures the investment, obtains financing, coordinates the acquisition, and then runs the day to day operations.
For illustration, Limited Partners will own 80% of the property and General Partners will own 20% of the property.
For the property acquisition, the Sponsor raises private money from qualified Investors typically under Rule 506 of Regulation D exemptions 506(b) or 506(c). An SEC lawyer will prepare a Private Placement Memorandum describing the business plan that is provided to the Investors.
The Investors' investment will correspond to a number of shares of an Limited Liability Company (LLC) who owns the property. The LLC operates as described an Operating Agreement that the Investors and Sponsor sign. Investors will have voting rights on major events such as resale or re-finance.
For illustration, if the Sponsor raises a total of $1,000,000 and, as an Investor, you invest $100,000 with a split at 80% for Limited Partners and 20% for General Partners, then your $100,000 investment represents 8% overall ownership of the property.
Cash flow money (income minus expenses including the loan repayment) will be distributed proportionally to the Investors' ownership every quarter.
The same principle applies in case of resale or refinance of the property: any profit made will be distributed proportionally to the Investors' ownership.
See illustration numbers in this post: