What Are Subscription Agreements For Real Estate Syndication?

By - October 2, 2024 - Uncategorized

Real estate syndication can be a great option for investors who want to pool their money to invest in expensive property. However, with multiple investors involved, it’s important to ensure that all parties know their roles, obligations, and rights. That’s where a subscription agreement comes in handy. This agreement offers clarity regarding the investment and helps protect the interests of everyone involved. Let’s take a closer look at subscription agreements for real estate syndication, including what they are and why they’re so important.

What is Real Estate Syndication?

In a real estate syndication, multiple investors partner together and combine funds to invest in real estate. This allows each person to invest in larger or more lucrative property than what they can afford on their own.

Two main roles make up a syndication: a syndicator (also called a general partner, or GP), who manages the investment, and the investors (also called limited partners), who make financial contributions and receive a share of the profits in return. Real estate syndications give all parties access to real estate investment opportunities that might typically be out of their reach.

What is a Subscription Agreement?

A subscription agreement is a legal contract between the syndication’s GP and investors. The document outlines how each party will be involved in the syndication, including how much money is being invested, what each investor receives in return, and other important terms and conditions of the deal. The agreement also explains risks related to the investment, so everyone involved is aware.

Why Subscription Agreements Are So Important in Real Estate Syndications

Having a subscription agreement in place is crucial for a number of reasons, the biggest one being that it provides legal protection for everyone participating in the syndication. The agreement helps prevent future disputes by clearly stating the terms of the investment and holding everyone legally accountable to those terms. It also helps ensure that everyone understands who is responsible for what, keeping people informed and on the same page.

Additionally, a subscription agreement discloses potentials risks associated with the investment. This helps protect the person managing the syndication from being held liable if the investment does not perform as expected. Risk disclosures also help investors have a clear picture of what they’re signing up for.

The agreement also has measures in place to ensure that only qualified investors join the syndication. Real estate investments can be complex, so this helps make sure everyone in the partnership has the necessary knowledge and skills.

What to Include in Agreement Contracts

Contracts for real estate syndication should be thorough in order to protect everyone involved. When creating an agreement, it’s important to include several key components to ensure everyone understands the investment opportunity, risks, and more.

Subscription Amount and Ownership Percentages

One crucial element of an agreement is the subscription amount, which is the amount of money that an investor contributes to the syndication. In return, the investor will receive an ownership percentage. This percentage determines the share of profits that the investor will receive, as well as the share of any other funds distributed by the syndication.

Investor Representations and Warranties

Experienced investors can be more appealing than inexperienced investors when working to build a successful syndication. That’s why agreements often include a component on investor representations and warranties. In this part, the investor confirms they are an accredited investor based on the requirements set by the Securities and Exchange Commission (SEC). The investor also declares that they have read all documents and materials related to the investment and that they understand any potential risks. Investor representations and warranties help protect syndicators from liability.

Distribution of Profits

The distribution of profits area of the agreement outlines how profits made by the syndication will be distributed to the different investors. This typically includes details about how often profits will be distributed, such as annually, quarterly, or monthly. This section should also explain how profits and shares will be calculated. Additionally, this part of the agreement should state the order in which profits will be distributed to investors.

Risk Disclosures

Just as in other types of investments, there are risks involved in real estate investments. Disclosing those risks in the agreement helps ensure that investors are fully aware of the risk they’re taking on when joining the syndication. This part of the agreement should include potential risks related to the property, such as its condition, environmental hazards, potential zoning issues, and the risk of tenants not paying rent. It should also list risks related to financing, market conditions, and other factors that could affect the performance of the investment.

Rights and Obligations of the Real Estate Investor

The agreement should list out the various rights and obligations of the real estate investor. For example, investors may have the right to receive regular updates about the investment’s performance, such as financial statements, market conditions, and property management activities. The agreement should outline the types of information the investor will receive, and how often. Investor rights may also include shares of the profits and how those are generated, and sometimes even voting rights.

Additionally, the agreement should make investors aware of their obligations. For example, investors need to know how much capital they’re responsible for investing, the payment schedule, and penalties that may occur if they fail to meet their financial obligations. Investor obligations may also include a confidentiality clause, rules about transferring or selling their ownership stake, and standards for conduct.

Syndication Exit Strategy and Redemption Rights

The exit strategy is an important part of the syndication. It explains how and when the syndication plans to sell the property, which gives investors a timeline for when they may receive their return on investment. The agreement should also include information on redemption rights, which allow investors to leave the syndication before the property is sold. The rights outline under what circumstances an investor can sell their share of ownership to another investor or back to the syndication. Including the exit strategy and redemption rights in the agreement help ensure all parties understand the plan and available options to exit early.

Work with a Real Estate Syndication Attorney

The subscription agreement can be a complex document. Working with a real estate syndication attorney can be a huge help in drafting comprehensive and legally sound agreements. Not only can an attorney experienced in this field write and review documents, but they can also negotiate the terms of the agreement. This helps protect your best interests while making sure the document is fair to everyone involved. An attorney can also provide legal guidance on mitigating risk, remaining compliant with regulations, and other aspects of the syndication process.

Contact Stevens Law

Syndications can be lucrative for investors and the deal sponsor. If you’re considering real estate syndication, contact Stevens Law. We have years of experience helping members of real estate syndications understand the laws and regulations, determining if specific properties are worth the investment, and creating materials like the subscription or syndication agreement and the operating agreement. Contact us today to learn more and book your consultation.


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