Real Estate Syndications

A syndication is simply a pooling of capital to buy a property larger than any individual could buy alone. The general partner (GP) finds the deal, signs on the debt, and manages the asset; the limited partners (LPs) provide the equity and take a passive role.

The success of the investment depends on the property. The success of the investor depends on the operating agreement — specifically, how it divides the money.

The Preferred Return Is Not a Yield

Most syndications offer a preferred return, typically between 6% and 8%. Marketing materials often make this look like a coupon or a dividend.

It is neither. A preferred return is a priority of payment, not a guarantee of payment. It means that if the property generates distributable cash, the LPs receive their capital’s stated percentage before the GP takes a share of the profits. If the property doesn’t generate cash — because of a vacancy, a blown renovation budget, or a spike in debt service — no one gets paid.

The critical question: Does the preferred return accrue? If a 7% pref pays out only 4% in year one, does the 3% shortfall carry forward to year two and get paid out of sale proceeds? In a standard structure, yes. If it doesn’t accrue, the GP can miss targets early and still take a full share of the sale proceeds later.

Reading the Waterfall

The waterfall dictates how cash is distributed. A standard sequence looks like this:

1. Return of capital: Investors receive 100% of their initial capital back (usually at sale or refinance).
2. Preferred return: Investors receive their accrued pref.
3. The split (carry): Remaining profits are split between LPs and the GP, typically 70/30 or 80/20.

The Catch: IRR Hurdles. Many waterfalls shift the split as returns increase. The GP might take 20% of profits up to a 15% Internal Rate of Return (IRR), and 40% of profits above it. This incentivizes the GP to perform, but it’s mathematically complex. Because IRR is time-sensitive, a GP can hit a high IRR hurdle by selling a property quickly for a modest absolute dollar gain, triggering their outsized share of profits while leaving LPs with a lower multiple on invested capital.

The Fee Stack

GPs don’t work for free while waiting for the property to sell. They charge fees along the way. Reasonable fees align incentives; excessive fees make the GP whole even if the LPs lose money.

• Acquisition Fee (1%–2% of purchase price): Paid at closing for finding and underwriting the deal. Note that this is based on the purchase price (including debt), not the equity raised.
• Asset Management Fee (1%–2% of gross revenues): Paid annually for overseeing the property manager and executing the business plan. Based on revenue, not equity.
• Construction Management Fee (5%–10% of renovation budget): Charged if the GP is managing heavy renovations.
• Disposition Fee (1%–2% of sale price): Paid at exit. Less justifiable if the GP also used a third-party broker who took a commission.

Total the fees. If a GP is making their entire margin on acquisition and asset management fees, they are economically insulated from the property’s eventual sale price.

Capital Calls and Dilution

What happens if the property needs a new roof and the reserve account is empty? The GP issues a capital call.

Check the operating agreement. Is the call mandatory or optional? If it’s optional and you don’t contribute, your ownership percentage is diluted. Often, it is diluted punitively — meaning your share shrinks by more than the mathematical equivalent of the missed contribution, to compensate the investors who bailed the deal out.

Debt Risk Is Equity Risk

In real estate, the equity takes the risk of the debt. If the GP bought a multifamily property using a floating-rate bridge loan, and interest rates rise, the debt service consumes the cash flow that was supposed to pay your preferred return. If the loan matures before the property can be sold or refinanced, the equity can be wiped out in foreclosure.

Never read the equity terms without reading the debt terms. Fixed vs. floating, term length, and loan-to-value ratio matter more to your downside than the GP’s track record.