Real estate syndications are more popular than ever. New syndications are forming every day.
That being said, forming a new one comes with some challenges. One of these such challenges is choosing a legal and organizational structure.
Here’s a quick guide on the legal and organizational structures.
Real Estate Investment Trusts - REITs
Due to the similarities with corporations and trusts, REITs can be easily identified as one. However, there is a big difference between corporations or trusts and REITs. Unlike a corporation or trust, a REIT must distribute9/10 or 90% of total taxable income through the dividends.
To be a Real Estate Investment Trust, there are some requirements that the syndication must meet. First of all, there should be at least100 members on the board. Secondly, the shares should not be dominated by only a few board members. More specifically, less than five members, cannot hold more than half the shares. In other words, less than 5percent of the board members cannot hold more than 50% of the shares.
If your syndication meets the above conditions, you can choose to be a Real Estate Investment Trust and structure your legalities and your syndication accordingly.
An advantage of REITs is they can choose to be publicly or privately listed and traded on the stock exchange.
Limited Liability Companies – LLCs
Among the three I am mentioning today, LLC or Limited Liability Company structure is perhaps the most common legal and organizational structure. More than half of the Real Estate syndications chose to stick with this legal structure and the reasons are obvious.
Flexibility of control and returns is an advantage of LLCs. Apart from the flexibility in return distribution and control, these entities also offer a lot of flexibility in matters like how the taxes should be dealt with.
In this type of legal and organizational structure, there must be some active organizers or sponsors who will be the managing members. They will also be the passive capital investors as regular members of the LLC.
Limited Partnerships – LPs
Like Limited Liability Companies, Limited Partnerships are also popular to the sophisticated Real Estate investors.
These legal structures have a GP or General Partner who will act as the sponsor or organizer. His work is to control and take charge of the active investing.
Other partners or members will be designated as limited partners. They are basically the passive investors who will provide the capital for investment. So, in this case, the passive investors or limited partners must trust the general partner’s (GP) judgment because he will be the one to oversee everything.
More sophisticated investors sometimes choose to organize in Delaware for tax and privacy reasons.
Bottom Line
There are other reasons to form a Real Estate Syndication. But these three are the most popular ones. However, choosing one of them will depend on how your relationship with your partner is, how many investors you have onboard, how much capital can you raise, etc. So everything boils down to you and your fellow investors or partner’s abilities and desire.
