Real Estate Syndication
LexInter | July 23, 2022 | 0 Comments

4 Legal Considerations In Real Estate Syndication

If you’ve decided to engage in real estate investing, you probably think of creating syndication to generate passive income and raise equity capital for your real estate portfolio. Because of this, you think of forming syndicates of investors as an effective strategy for capitalizing on money in the real estate world. However, like other investment strategies, establishing syndication comes with specific requirements that need to be complied with to avoid legal repercussions.

So, if you want to use syndication in your real estate deals, below are the four legal considerations you need to remember from the get-go:

What Is A Real Estate Syndication?

Real Estate Syndication

Essentially, real estate syndication refers to a group of people who put their financial resources together to invest in real estate properties, such as apartments, fix and flip, and commercial properties.

When forming a real estate syndication, there are two roles involved. These are:

  • Syndicator or Sponsor: This individual is in-charge of acquiring real estate properties, securing the financing, and handling the project’s daily operations on behalf of the investors.
  • Investors: In exchange for the equity capital they provide to the syndication, they get passive income from the real estate project. Unlike the syndicator or sponsor, investors aren’t required to manage the operations and have adequate real estate experience.

What Are The Legal Considerations Involved In Real Estate Syndication?

Now that you’re aware of what real estate syndication is, it’s time to familiarize yourself with the legal considerations you need to take to ensure you’re legally protected throughout the process. Some common legal considerations to keep in mind can include the following:

1. Paperwork Required

Documents

One of the essential things to consider when legally forming a real estate syndication is the paperwork required, especially for raising equity for real estate syndication. Since the syndication involves two or more parties, agreements should be put in place to protect yourself and your investments against potential legal consequences. With the help of a dedicated real estate syndication lawyer from Moschetti Law Group or other reliable law firms within your location, you should have the following legal documents ready when dealing with raising equity real estate syndication:

  • Private Placement Memorandum: It refers to an official document drafted for potential investors, introducing the investment and all the information about it. It also clearly outlines the procedures as to how the syndicator and the investors obtain compensation, the fee structures involved, and the distribution of rental income.
  • Operating Agreements: It refers to a document that provides the syndicators and investors with the guidelines to follow regarding the management of real estate syndication.

Having the right paperwork is necessary to ensure the syndication is created in accordance with the law. The documents can help provide a better structure for the real estate entity formed by real estate professionals and prospective investors. Hence, it’s crucial to have a lawyer by your side to ensure all the paperwork for raising equity for the syndication is drafted legally and without any conflicting information.

2. Business Structure

Another legal consideration when dealing with real estate syndication is the business structure you’d prefer. Generally, there are different business models to choose from. Each of these structures can be advantageous or disadvantageous in terms of taxes, monetary liabilities, and other similar situations. To pick a suitable business model, you may consider the following:

  • Limited Liability Corporation (LLC): This business model is usually used in forming real estate syndication. When you choose this structure, the investors are safeguarded against the liability of the LLC. This means that if the syndication can’t pay its debts and other liabilities, the creditors can’t run after the personal possessions of the investors.
  • Limited Partnerships: This is also attractive to potential real estate investors because of its ability to provide passive income without any risk of accountability.

By choosing the proper business structure for your syndication, you can have peace of mind knowing all parties involved and the entity itself is protected against future liabilities.

3. Compliance With Securities Regulations

Compared to other business opportunities, real estate syndication is required to comply with certain securities regulations. These laws can provide the registration requirements for private business entities that would like to go public to raise the necessary capital for investments. These can also apply to real estate syndications.

Accordingly, when it comes to syndications, they fall under the Regulation D exemptions, which allow the company to get rid of the necessary disclosure and reporting requirements required by the Securities and Exchange Commission (SEC). However, navigating these exemptions is never easy. If the entity fails to comply with the rules, it can result in significant legal consequences, including payment of penalties and an increased cost of raising capital for the business.

4. Tax Implications

tax

Although the syndicators and investors profit from the same sources, their taxes are treated differently. This is one of the legal considerations to take when forming a real estate syndication. For instance, syndicators receive more tax benefits than investors. They can use the real estate investment losses to offset their active income, resulting in substantial tax savings.

On the other hand, since the investors don’t necessarily and actively participate in the handling of the investment, they can only deduct the real estate losses against their passive income, which may be costly on their end.

Thus, due to this difference in tax treatment, it’s essential to seek legal assistance to reduce the potential risks and educate yourself about the rules and regulations associated with real estate syndication.

Bottom Line

Establishing a real estate syndication can be challenging, especially if you’re unfamiliar with the legal ramifications. If you deal with this investment opportunity, you need to arm yourself with the proper knowledge to ensure you don’t get into any legal trouble.

Therefore, if you’re starting syndication anytime soon, it’s best to keep the legal considerations mentioned above in mind. That way, you’ll know what to do to ensure you, the investors, and the investments are legally protected.

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