Unlocking the Power of Real Estate Syndications to Build a Better World

The Jobs Act of 2012 and Democratizing Real Estate Investment

SYNDICATIONS

Direct real estate investing used to be the exclusive domain of the ultra-wealthy and well-connected.  That all changed with the JOBS Act of 2012, which democratized investment in real estate through the loosening of regulations around syndications – that is, the pooling of investor dollars to pursue larger deals.

Prior to 2012, real estate developers like me could not ‘advertise’ an offering. They could not publicly talk about it. Additionally, an existing relationship was required in order to solicit investment from someone. So, unless you had a large rolodex of wealthy individuals you knew and could call up, good luck raising millions of dollars!

But the loosening of these regulations, along with technological innovation over the past decade, has opened up capital raising beyond finance guys and the already-wealthy to smaller, local operators like me. I’ve spent the last decade not as a professional capital raiser, but working in the trenches to build a one-of-a-kind, holistic urban design, architecture and construction practice.

I know how to build things. And now, with an incredible team at Building Culture, we can build things that nobody else can.

For the record, I also happen to be a former CPA from an old life, having started my career at KPMG in 2011. I only practiced for 1.5 years, but that financial background has served me well, both in running a business, and now in putting deals together and raising capital.

Why is this significant?

Prior to 2012, the number of ‘ordinary’ people, meaning non-professional investors—doctors, lawyers, business owners, etc—who could have been approached for a private real estate syndication was extremely limited.

They would have had to receive a personal call from someone they knew with a potential deal, due to the preexisting relationship requirement. And the inability to ‘advertise’, to talk about publicly, meant there was no way for an individual to stumble across an opportunity.

There is a reason most people, even wealthy individuals, do not know what a real estate syndication is.

Most of those people, if they invested in real estate at all, would have invested through an institutional money manager or a REIT, who would have directed the dollars on their behalf, investing in big real estate deals across the country.

But now? People like me can talk to people like you about what we want to build together. Ordinary investors, or just people with excess cash who do not consider themselves “investors” proper, have the opportunity to directly invest into real estate deals they want to participate in, and could not fund on their own.  

Here is an example.

Say a developer was building or restoring these mainstreet buildings below for a $20,000,000 total project cost.  While very few people could afford to do that alone, syndications allow the pooling of investor dollars and for you to invest directly into that deal to build, and perhaps own, those buildings.

Syndications give you the opportunity to be selective, direct your dollars, and invest in the things you believe in.  

You can choose who to partner with and what projects to invest in. Rather than handing over money to a REIT or money manager who decides on your behalf, you can find a real estate deal that you like, want to support, and then invest directly into that deal – while also receiving all the tax benefits of investing in real estate, such as depreciation and mortgage interest deductions.

HOW IT WORKS

The structure of a real estate syndicate typically involves two roles: the General Partner (GP) and Limited Partners (LPs). The GP, also known as the sponsor or syndicator, is responsible for identifying, acquiring, managing, and eventually selling the investment property. They create the deal, offer it to passive investors (LPs) to raise the necessary funds, and then oversee the execution.  

The LPs are individual investors who contribute capital but have limited liability. Their risk is confined to the extent of their investment in the syndicate. This structure allows investors to benefit from owning real estate without the burdens of direct management.

Returns are usually generated through rental income, sales, or a combination, and are distributed to investors according to their share in the syndicate.  Typically, LPs receive their initial investment back in full, and then profits are split between the GP and LP at an agreed upon ratio–70/30 and 80/20 LP/GP profit splits are common.  This aligns incentives as the GP only gets paid after investor dollars are returned and profits are generated.

While there are different ways to structure, I typically use an LLC as the investment vehicle – LPs joining as Class B passive members, and we as the sponsor are the Class A managing member who run the company and shoulder the operational risk.

To invest, all an investor has to do is sign the LLC Operating Agreement to join as a passive member, in addition to a Subscription Agreement which outlines the investment amount and terms.  That’s it.  It’s that easy.  You are now an owner in a real estate venture.

SYNDICATIONS AS A TOOL TO BUILD A BETTER WORLD

For investors seeking to diversify beyond traditional stock and bond markets, real estate syndications are a compelling option.  It provides access to high-value real estate ventures, the ability to select specific projects and partners, and the benefits of physical asset investment. 

But beyond diversification, here is why I get so excited about syndications: personal agency and relationship investing.

Capital is a powerful force.  It facilitates the building of the world we all live in.  But when all those dollars flow through large, faceless, institutional funds, what ends up happening?

We get a lot of large, soulless, institutional buildings.  Like this:

And this:

Where were these pictures taken?  Arizona?  Texas? California? Michigan?  Who knows, and who cares – because they’re not places or buildings worth caring about.  They don’t reflect the local culture or community.  They’re not intended to.  They’re built to preserve pension funds and please investors who have never visited, nor care about, your town or the people living in it.    

These are value engineered financial products that rely on simplicity, optimization and repeatability that target easy institutional funding.  Developers know what these institutions are looking for and give it to them.  

It’s one of the main reasons everything across the country is looking increasingly the same – 90% of new development is Anywhere, USA, packed with the same architecture and same corporate franchises.  It’s fast, it’s easy, and institutional funds can understand and evaluate it from a far-off corporate boardroom.  Their relationship to your community is a market study and some statistics, the buildings a physical manifestation of an Excel spreadsheet.      

The human element has been completely overridden by the check boxes and evaluation metrics of distant, disconnected investors.  It’s not their fault – it’s an issue of scale and proximity. 

This is why syndications are so powerful.  The JOBS Act in many ways leveled the playing field, enabling ordinary people to play this game too, and participate in shaping what gets built.  Not only can we compete with the big guys, but we actually have an advantage.

The smaller scale makes us more nimble, allows us to tackle more complex projects, and it relies more heavily on relationships and human connection.  It brings the human element back into building and developing, and with it, the ability to build places worth caring about again. Places people love.   

Rather than trust your dollars to money managers or REITs that will build more of the above, syndications enable you to fund the building of the world you want to see and live in.  The world you want your kids and grandkids to inherit. They give you the power and agency to help create the world you dream about, rather than simply taking what you are given by the inherently extractive Industrial Development Complex.  You can help build things that improve the world and enrich it.

Take a look at this illustration by Bevan & Liberatos architects.  It’s a study of two different built forms on the same block with nearly identical density and unit counts.  

Versus this:

Which would you prefer to live in?  For your parents or kids to live in?  Which would you prefer to drive your grandkids by and say “I helped build that”?

REITs and institutional funds have no interest in the bottom. It’s more complex and difficult to model and build. Why not make it easy and just do the simplified, top version, over and over in an assembly-line-like manner? It’s easy to make that decision when the people investing and directing the dollars will likely never step foot on the property after its built, let alone drive by it.

The product they are selling is the financial return, not the building. Just take it and run!

Even though the human scaled, walkable neighborhood depicted on the bottom will be far more desirable and valuable in the long run, it will simply never get built by institutional dollars.

Beauty like this will never get built:

The Bend. Our first development project in Carlton Landing, completed in 2020.

And what a tragedy that would be!

If we want to take back our built world from the Industrial Development Complex, it will be through syndications and private citizens deciding what they want to put their hard earned dollars towards building, rather than handing it off to a fund manager to decide on their behalf

It’s not just up to the developers and builders, though we certainly need more of those who understand how to execute these projects, too.  Ultimately, it’s about the capital.

And this is why I believe syndications are the key to unlocking a new renaissance in real estate and architecture. Investors can build direct relationships with operators they believe in and want to support – all while making money and having a lot more fun in the process.

I hope this gets you as excited as it does me. 

Austin

NOTE

As a technical note, I am specifically referencing the Reg D, 506(c) exemption that enables public advertising and capital raising from accredited investors. The Jobs Act of 2012 also enabled crowdfunding, raising small dollar amounts from non accredited investors. While I hope to explore that one day, for now we are working with the 506(c) exemption.

 

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