Level 3 Chapter 3: Group Real Estate Investment Forms Flashcards
(12 cards)
Syndicates
A real estate investment syndicate is a group of investors that get together and combine resources to make investments they wouldn’t be able to make on their own. Forming a syndicate is known as syndication. It’s important to note that “syndicate” is not a legal term like corporation, partnership, or trust (though a syndicate can be created as any of these business forms). Will have one sponsor, a group of investors, While syndicates can be used for something as simple and straightforward as purchasing a single-family residence, they are typically created for the financing of large commercial real estate projects, including:
Multi-family apartment complexes
Office space
Retail centers
Industrial buildings
Corporation
Ensures centralized management as well as limited liability for the investors, but corporations are seldom utilized in modern syndicates because of their negative tax features
General Partnership
Avoids the double taxation issue you’d have with a C corp, but the unlimited liability and lack of centralized management make it ill-suited to a syndicate
Limited Partnership
Combines the tax advantages of a partnership with the centralized management and liability shield of a corporation.
LLC
Permit active participation in management and control by the members along with limited liability similar to corporate shareholders.
If you play your cards right, an LLC will be taxed like a partnership (as a pass-through entity) rather than as a C corp (taxed twice).
That’s why the LLC is the most common form for a syndicate to take. However, you will often see syndications structured as an LLC owned by a partnership made up of both general and limited partners.
Remember: It should be noted that LLCs as an entity cannot hold a real estate license.
3 Phases of Syndication
- Organization
This includes the planning, acquiring property, satisfying registration and disclosure rules, and marketing processes. - Operation
During the operation phase, the sponsor usually manages both the syndicate and the real property. - Liquidation
Liquidation or completion is the resale of the property.
Joint Venture
Kind of syndicate that, instead of being an ongoing investing group, is a one-off collaboration. Typically, a joint venture will have one operating partner (like a general partner, but without the liability) who brings real estate expertise to the relationship, and one or several capital partners, or investors. The most popular form for a joint venture to take is the LLC.
Real Estate Investment Trust (REIT)
A trust that invests in, owns, or acquires real property. It is in itself owned by investors who share the trust’s profits according to shares.
3 Types of REITs
- Equity REITs
- Mortgage REITs
- Hybrid REITs
Equity REITs
Own or operate income-producing real estate.
Most REITs are equity REITs — in fact, if you hear someone referring to just a “REIT” without clarifying, they’re probably talking about an equity REIT. Usually, equity REITs specialize in one type of real estate — for example, malls or houses or hotels or office buildings.
Mortgage REITs
mREITs, make money by buying or originating loans or mortgage-backed securities.
Essentially, they provide financing for both residential and commercial property. mREITs allow people to invest in the mortgage market with the ease and transparency of a stock or mutual fund purchase. Fewer than 10% of REITs are mREITs.
Hybrid REITs
That’s right, they’re REITs that invest in both income-producing property AND mortgages and mortgage-based securities.
Hybrid REITs’ more diversified holdings hedge against the risk of investing in just one kind of thing.
