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What is Syndication?

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.

This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements are speculative in nature and involve a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC, member FINRA, SIPC.