Blog | Clark St Capital/Real Estate Investment/Real Estate Syndication Structures: Understanding the Pros and Cons

Real Estate Syndication Structures: Understanding the Pros and Cons

Tuesday, September 12, 2023

Interested in real estate investing, but don't have the time to manage properties and residents? Real estate syndication may be the solution. By joining a group with other investors, you can combine your resources for a more efficient investment. To make the most of your investment, it's important to understand the various structures and their benefits and drawbacks. Let us guide you through the process.

There are two parties involved in a real estate syndication. The Sponsors or General Partners take charge of identifying, planning, and managing the real estate investments. And the Limited Partners who take a passive role in the investment by providing the capital required for the deal.

There are also two types of structures in a real estate syndication and they are as follows:

1. Straight Split

The straight split structure is a simple and transparent method for dividing profits in a business deal. With this approach, both general and limited partners are entitled to a share of cash flow distributions, refinancing, or sale proceeds based on their pre-determined ownership percentage. This makes it easy to understand and track each stakeholder's earnings, ensuring fairness and accountability for all parties involved. Additionally, it can provide investors with greater control over their investments. On the other hand, a potential disadvantage is that the sponsor may not have as much of an incentive to maximize profits, since they are already guaranteed a percentage.

Below is an example of what a straight-split structure in a real estate syndication may look like.

With a straight split of 70/30, if a real estate syndication generates $100,000 in profit, 70% or $70,000 will go to the limited partners and the remaining 30% or $30,000 will go to the general partner/sponsor.

2. Waterfall

The waterfall structure is based on the natural flow of a waterfall, where water descends from top to bottom and pools before continuing to the next level below. This structure allows the splitting of profits unevenly among partners. Each investor is paid based on their investor class, ownership of the LLC and property itself. This information is captured in the Private Placement Memorandum (PPM) and Operating Agreement (OA).

For example, the first return hurdle deal is to pay the limited partners a 7% preferred return, which means investing $100,000 in a real estate syndication deal with a 7% preferred return will earn you $7,000, as a passive investor. If the profit exceeds 7%, the excess can be distributed Limited Partners and, ultimately, to the General Partners, as dictated in the PPM and OA.

Syndication in real estate can offer a dynamic and profitable way to become involved in the real estate market with negligible risk. You'll want to make sure you understand the two different structures, the straight split, and waterfall, as well as the advantages and drawbacks associated with each.

Remember: knowledge is key when it comes to all types of investments! Join our Investor Club and weā€™ll help you review upcoming projects and evaluate your options. Investing doesn't have to be complicated or intimidating--with real estate syndication, the sky's the limit!

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