As we talk about 1031 exchanges and Delaware Statutory Trusts (DSTs), we may mention terms that you don’t fully understand. While there are hundreds of key terms involved in 1031 exchanges and DSTs that you can find defined in any investment glossary, we’ll explore some of the terms we frequently get asked to clarify.
Today we seek to answer the question: What is syndication?
As generally defined, syndication is the process of forming a group of individuals or organizations for the purpose of jointly undertaking a project that requires significant capital.
The syndicate is the group of individuals and organizations that are working together for the common purpose.
Syndicate, as a verb, is the act of selling a product to a group of individuals or organizations.
Syndicated, as an adjective, describes the product that has been prepared to be sold to a group of individuals or organizations.
In terms of real estate, therefore, syndication is the process of bringing investors together to pool their financial resources to acquire one or more real estate assets. Practically, syndication is the selling and issuing of ownership interests in a partnership or trust that owns rights to a real estate asset or a portfolio of real estate assets.
Investing in syndicated real estate contrasts investing in real estate as the sole owner. With both types of investing, the investor directly owns the real estate assets. The difference occurs with how much of the real estate asset is directly owned by the investor. When investing in syndicated real estate, the investor contributes enough to purchase, own, and profit from a portion of the real estate asset, while other investors purchase, own, and profit from the remainder of the asset. When investing in syndicated real estate, investors take ownership of the investment property proportional to their capital contribution.
Syndication is beneficial for many reasons. First of all, it gives investors an opportunity to invest in higher valued properties that they potentially could not afford on their own. Secondly, it reduces any one investor’s liability for the property and often eliminates the liability for the individual investors altogether because the partnership or trust takes on all property liability. Lastly, there are often tax benefits when investing as part of a syndicate.
We often refer to syndication as an alternative to traditional 1031 exchanging. A traditional 1031 exchange involves an individual or a single organization exchanging investment real estate of which they are the sole owner with replacement investment real estate of which they will be the sole owner. A syndicated 1031 exchange differs from a traditional exchange because the investor replaces their investment real estate with syndicated real estate.
A Delaware Statutory Trust, or DST, is one such entity that can syndicate real estate. When a DST acquires a real estate asset, beneficial shares of interest in the DST can be sold to investors. The investors then become beneficiaries of the DST and direct partial owners of the real estate asset with rights to their portion of the income produced by the asset. A DST is one example of real estate syndication and the most common type of real estate syndication related to 1031 Crowdfunding.
While the information provided above has been researched and is thought to be reasonable and accurate, 1031 Crowdfunding are not lawyers or tax professionals. It’s important to consult with a licensed tax professional regarding your personal tax situation.