As we talk about 1031 exchanges and DSTs (Delaware Statutory Trusts), we may mention terms you don’t fully understand. While there are numbers of key terms involved in 1031 exchanges and DSTs that you can find explained in any investment glossary, Here we’ll explore the terms that are frequently asked.
WHAT IS SYNDICATION?
Today we will discuss the answer to the question: What is syndication?
In general terms, syndication is the process of building a group of individuals or organizations for the purpose of mutually undertaking a project that needs significant capital. The syndicate is the group of organizations and individuals that are working together for the same purpose.
As a verb, the syndicate is the act of selling a product to a group of people or organizations.
As an adjective, syndicated describes the product that has been prepared to be sold to a group of people or organizations.
WHAT IS SYNDICATION IN REAL ESTATE
In terms of real estate, syndication is the process of bringing the investors together to pool their financial resources to own one or more real estate assets. Practically, syndication is the selling and issuing ownership interests in a partnership or trust that owns rights to a real estate asset or holdings of real estate assets.
Syndication is the process of Investing in syndicated real estate contrasts investing in real estate as the sole owner. In both types of financing, the investor directly holds the real estate assets. The exception occurs with how much of the real estate asset is directly owned by the investor. When investing in syndicated real estate, the investor contributes enough to buy, own, and profit from a share of the real estate asset, while other investors buy, own, and profit from the remaining asset. Investors take ownership in the investment property proportional to their capital contribution when investing in syndicated real estate.
Syndication has many benefits:
- Firstly, it allows investors to invest in higher-value properties that they possibly could not afford on their own.
- Secondly, it reduces any one investor’s responsibility for the property and often eliminates the responsibility for the individual investors together because the partnership or trust takes on all responsibility for the property.
We usually refer to syndication as an alternative to traditional 1031 exchanging. A traditional 1031 exchange involves a single organization or an individual exchanging investment property of which they are the sole owner with replacement investment property of which they will be the sole owner. A syndicated 1031 exchange is different from a traditional exchange because the investor replaces their investment property with the syndicated property.
A DST, or Delaware Statutory Trust, is one such entity that can syndicate real estate. When a DST procures a real estate asset, profitable shares of interest in the DST can be sold to investors. The investors then become beneficiaries of the Delaware Statutory Trust and direct partial owners of the real estate asset with rights to their portion of the income produced by the asset. A Delaware Statutory Trust is one such example of real estate syndication and the most common type of real estate syndication related to 1031 Exchange.