Randall Beach and Cheryl Sarjeant - Syndication: An alternative financing tool for small to mid-sized real estate development projects

The economic upheaval of the last several years has resulted in the availability of many distressed properties that could once again be profitable under the right investment and management scenarios. This represents significant opportunities for the experienced real estate investor. However, one of the most common barriers to taking advantage of today's commercial real estate opportunities is the lack of access to capital. A solution for the real estate developer, therefore, is to seek alternative financing models to capitalize on current opportunities. Real estate syndication is one such alternative. Real estate syndication is the pooling of capital from a group of individuals or entities to fund one or more real estate investments. Syndication is commonly used to: (i) fund the acquisition of real property in whole or in part; (ii) provide the necessary equity injection required by a lender; (iii) refinance or pay down existing debt; (iv) serve as working capital for the redevelopment, construction or improvement of real estate; or (v) reimburse capital investment made by project principals. By pooling funds, investors are able to get more property for their money and often be involved in exciting projects that they otherwise could not afford to participate in. The concept of pooling funds for real estate investment is not new. Syndication, however, has not gained as strong a footing in small, regional commercial real estate markets. More common in smaller, local markets is an informal pooling of funds by friends and family often accomplished on the proverbial "back of the napkin." While these types of arrangements can be successful, they present significant limitations. Regardless of the type of arrangement (public or private), the pooling of funds must be in compliance with applicable federal and state securities laws and the investors ought to be sophisticated enough to know what they are getting into. Before spending the time and expense of forming the syndicate, it is important to map out the syndicate by preparing a detailed business plan that identifies the investment property, any redevelopment or improvements necessary to meet the investment goals, and projected financial data. Syndicate sponsors should consider employing the services of an accountant to review financial information and anticipated budgets. As part of the initial business plan, sponsors ought to determine the types of potential investors who may be interested in the project and where those investors are located (i.e., regionally or nationally). Where investors are located may impact the necessary regulatory filings since many states have different requirements. After the business goals have been mapped out, a real estate syndicate is typically structured as a limited liability company or limited partnership. Once the investment structure is decided on, the syndicate must determine how the applicable securities laws and regulations could impact the offering of membership or partnership interests for sale. In New York State, the regulations are designed to protect investors. Shares of limited partnerships or limited liability company membership interests are considered regulated securities. The developer will need to make certain disclosures and provide information about the syndicate to the government for approval. The approval process can take time and this should be factored into the project timeline. Advance planning can assist the developer in preparing a strategy for budgetary concerns and time management. In today's market, the syndicate comes in all shapes and sizes, and planning with appropriate legal and financial professionals can assist the developer/sponsor in effectively implementing the business plan for the investment and carrying out the project with available private equity financing. Randall Beach is a partner and Cheryl Sarjeant is an associate at Whiteman Osterman & Hanna LLP, Albany, N.Y.