Real estate deals are usually structured in one of two forms; syndications or joint ventures. In this episode, Charles discusses what they are and when they are used.
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Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is the difference between real estate joint ventures and syndications. Now real estate investors will sometimes simultaneously use the terms. Joint ventures also known as JVs and syndications when describing how they’re purchasing a property. But what real difference in a joint venture, two or more investors are partner together, but in a joint venture, each investor must take an active role in the investment. A syndication, however, allows for passive investors. Now a joint venture example would be you and two other investors are flipping houses. You are a real estate agent and handle finding the properties and selling them after they’re completed. The second partner handles the renovation process and the third partner handles financing. All investors partners are active. A syndication example would be more something similar to what we do here at Harborside partners.
A group of possibly with one or two other groups known as a partnership, identify potential properties, underwrite them, put them under contract, raise money from passive investors, purchase them, renovate and reposition them, and then refinance them or sell them. The key here is that we are legally allowed to accept passive investors in a syndication. There’s a four question test known as the we test that attorneys will use to determine if you are forming a JV or syndication. Number one, it is an investment of money. Well, that’s both JVs and syndications. Question two. There is an expectation of profits from the investment, both JVs and syndications. Question three. The investment of money is a common enterprise that is investors pool, their money or assets together to invest in a project that’s both JVs and syndications. The fourth question, however, any profit comes from the efforts of a promoter, AKA, a general partnership or third party.
Now this last question is where the distinction is made. Any profit comes from efforts of a promoter or third party. If this is true, it is a syndication. Now the Howie test came about from a 1946 court case involving real estate contracts in citrus groves, located in Howie in the Hills, Florida, which is about 30 minute drive Northwest of Orlando. I will link to the case in the show notes, if you’re interested in learning more, but this is how an attorney will decide if you are selling a joint ventures or selling securities. Now, one of the main reasons why investors will try to blend and bend the rules of setting up a joint venture versus a syndication is mainly to avoid complying with the security offering rules. In the addition to the fact that legal fees for a syndication are about 10 to $20,000 and the legal fees for a joint venture are really just a fraction of that.
Now, as Kim Lisa Taylor, a syndication attorney explains this to maintain a defensible joint venture. All parties must have an active role in the common project or company. This role must be more than just a right to vote. Each should have an actual defined scope of work, and you should be able to demonstrate that they actually did it. And this will be something that your attorney should add into your L OCE agreement. When you are forming a joint venture. Now always consult an attorney before setting up a syndication or joint venture. And I hope you enjoyed. Please remember to rate review, subscribe, submit comments, and potential show topics at global investors, podcast.com. Look forward to two more episodes next week. See ya then
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.
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