by Syndication Attorneys PLLC | Dec 20, 2017
Although there are numerous ways to structure a commercial income-producing property, the following model describes a typical 2 Class syndicate with equity Investors and a separate management entity.
How to Structure a Real Estate Syndicate
In the above scenario, you will form a separate, title holding entity that is also the borrower on any bank loan and sells interests to Investors (the Investor Entity). If you use a limited liability company (LLC) as the Investor Entity, it will be “manager-managed” with a “Manager” and “Members” as the passive Investors. Alternatively, you could use a Limited Partnership with a general partner (GP) as the management class and limited partners (LPs) as the passive Investor class. For purposes of this article we will use terminology consistent with an LLC (Manager and Members), as this is the structure most syndicators currently use.
The Investor Entity will need an agreement between management and Investors (the Company Agreement) that will govern how the company will operate. The Company Agreement will define management and Investor rights and duties and how cash will be distributed to each of the participants.
For the Manager, you would typically use a separate LLC (Manager LLC) that includes the management team as its members. If an individual is named as the Manager, the company can be harmed if something happens to that person, as it will no longer have a Manager until the Members can elect a replacement. If the Manager is a multi-member LLC, the Manager LLC will continue to exist as long as it has members and the Investor entity will be unaffected if something happens to one of them.
The Manager does not keep an ownership interest or voting rights in the company. However, the Manager will earn certain fees for its active role in managing the Investor Entity, including such things as an Acquisition Fee or Organization and Due Diligence Fee, Asset Management Fees, Refinance Fees, or Disposition Fees. See Syndication Attorneys, PLLC’s article, “12 Ways You Can Earn Money as a Syndicator.”
The Investor Entity in a syndicate will typically have multiple classes of Members. We’ll call them Class A (for cash-paying Investors) and Class B (the management or “sweat-equity” class). If certain Class A Members will have different returns, Class A can be broken into separate sub-classes (A-1, A-2, etc.).
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