REAL ESTATE SYNDICATION

REAL ESTATE SYNDICATION

Real estate syndication offers the opportunity to channel private savings into real estate investments for which
other financing is not available. It has been a popular method of financing the purchase and sale of properties in
the higher price ranges.

The term “syndication” has no precise legal significance. It is a descriptive term for an organization or
combination of investors pooling capital for investment in real estate. The responsibility, obligation and
relationship of the syndicator to the investment group and the investors to each other are determined principally
by the form of organization.

Real estate licensees have been active in real estate syndication for years. This follows naturally from licensees’
involvement as agents in purchase and sale transactions. When confronted with a listing or other opportunity to
sell property requiring financing that could not be handled by a single purchaser, a real estate broker might turn
to others for pooling of capital necessary to consummate the purchase.

In General

A typical real estate syndication combines the money of individual investors with the management of a sponsor,
and has a three-phase cycle: origination (planning, acquiring property, satisfying registration and disclosure
rules, and marketing); operation (sponsor usually manages both the syndicate and the real property); and
liquidation or completion (resale of the property).

Benefits

Often real estate brokers or developers have been at some time in a controlling position with respect to an
expensive piece of property that appears to offer extremely favorable opportunities for profit to the purchaser.
All too often the investment outlay on such a purchase is more than any single client can manage. The real
estate licensee who understands the methods of syndication can turn what would otherwise have been a
frustrating and unrewarding situation into a possible profitable transaction for both the licensee and the
investors.

By pooling limited financial resources with others who are similarly situated, a small-scale investor may
participate in ownership and operation of a piece of property that is too much to handle singly or in a joint
venture with one or two others.

Syndication also offers professional management which might not otherwise be economically feasible for the
small investor. Professional management, the basic commodity that the syndicator has to offer, is crucial to
successful syndication.

Syndicate Forms

Selecting the form of organization involves practical as well as legal and tax considerations. Each of the
available entities has advantages and disadvantages. The corporate form insures centralized management as
well as limited liability for the investors but is seldom utilized in modern syndicates because of its negative tax
features. The general partnership (joint venture) avoids the double taxation normally involved in a corporate
entity but the unlimited liability provision and lack of centralized management militate against its use. The
limited partnership combines many of the advantages of the corporate and partnership forms. It has some of the
corporate advantages of limited liability and centralized management and the tax advantages of the partnership.

Limited Liability Corporations

A limited liability company ( LLC) is a hybrid business entity that essentially combines aspects of a corporation
with a partnership. This entity form permits active participation in management and control by the members
along with limited liability similar but with certain exceptions to corporate shareholders. Properly created and
operated, a LLC may be taxed similar to a partnership and avoid some of the taxation problems of a
corporation. It should be noted that LLCs as an entity can not hold a real estate license.

Limited Partnership

Under the California Revised Limited Partnership Act, a limited partner is not liable as a general partner unless
the limited partner is also named as a general partner in the certificate of limited partnership or the limited

partner participates in control of the business (Corporations Code Section 15632). If the limited partnership
agreement otherwise satisfies certain tax requirements, the limited partnership is taxed as a partnership rather
than as an association taxable as a corporation.

Regulatory Control of Real Estate Syndicate Offerings

The increasing use of syndicates to invest in real estate in California led to the enactment of the Real Estate
Syndicate Act (Business and Professions Code Sections 10250, et seq.) in 1969. Operative January 2, 1970, this
law was applicable only to noncorporate syndicates owned beneficially by 100 persons or less which were
formed for the sole purpose of investing in real property. Jurisdiction over these offerings was transferred from
the Department of Corporations to the Department of Real Estate. Jurisdiction over other syndicate offerings
(e.g., oil and gas syndicates) remained with the Department of Corporations.

Effective January 1, 1978, the Real Estate Syndicate Act was repealed and the regulation of offerings of all real
estate syndicate interests was again vested in the Department of Corporations.

A given form of business for pooling investment money may constitute a securities offering for which the
organizers must seek a permit or exemption from the Department of Corporations.

The 1977 legislation also added Section 25206 to the Corporations Code, enabling real estate brokers to engage
in the sale of certain types of security interests without having to obtain a broker-dealer license from the
Department of Corporations. The legislation also added a provision to the Real Estate Law making it the basis
for disciplinary action against a real estate broker if he/she violates certain provisions of the Corporations Code
or the regulations of the Corporations Commissioner in transactions involving the sale, exchange or trade of
real estate syndicate interests in which the broker is permitted to engage under the Corporations Code. Real
Estate Brokers seeking to engage in the sale of security interests in real estate syndicates should also consult
Department of Corporations Release No. 62-C (July 2, 1980).

Persons desiring detailed information concerning the offer and sale of interests in real estate syndicates should
seek such information from the Department of Corporations.