Syndication Terms & Definitions [Cheat Sheet]

Syndications are complex legal structures that come with their own set of rules, regulations, and vocabulary.  While passive investors do not need to spend hours studying tax code or securities law, they do need to speak the common language.  To understand the offering documents, terminology, gauge risk, and make informed investment decisions, there are some key terms to know.  Whether you are a rookie investor or just need a quick refresher sometimes, feel free to bookmark this page for easy reference. 

The first couple of offering documents may feel a little overwhelming.  Let’s be honest: 100–200 pages of legal documentation and industry jargon is no beach read. But once you get through a few, you will see that much of the document is actually repetitive boilerplate material.  

Once familiar with the language, you should be able to identify key points to quickly (relatively speaking) determine whether the deal should advance to the next level: a thorough review by you.  Let’s get down to basics: 

General Terms

Syndicate (also known as syndication): A group of individuals or companies that pool their resources (e.g., capital and expertise) to complete a large project that they are unable to accomplish or complete on their own. All parties reduce their individual exposure to risk and take advantage of other’s strengths to accomplish a goal. In real estate, this group includes general partners and limited partners to acquire, manage, and sell an asset(s).
Real estate securities: Includes equity and debt securities of both publicly traded and private companies that own real property or loans secured by real estate.

Types of Investors

NOTE: Depending on how the offering is organized and registered with the SEC, potential investors must be either an accredited investor, qualified client, or qualified purchaser. 

Accredited investor (also known as sophisticated investor): A high-net-worth individual or entity that can participate in private investment (e.g., syndications). Set by the Securities Exchange Commission (SEC), the current qualifiers are:

  1. An annual income of $200,000 (or $300,000 for joint income) for the last two years OR 
  2. A net worth exceeding $1 million (excluding the value of primary residence)

(For more information, click here.)

Qualified client: An individual or entity that meets any of the following criteria set by the SEC: 

  1. Has $1 million or more of assets under management (AUM) with the syndicator after the investment 
  2. Has a net worth of $2.1 million (excluding the value of primary residence) prior to their investment
  3. Is a “qualified purchaser” (see next section) OR  
  4. Is an officer or director of the syndication’s investment firm or is an employee who participates and has been doing so for 12 months

Qualified purchaser: An individual or entity that meets any of the following criteria set by the SEC:

  1. Has at least $5 million in investments and two or more close family members (spouses, siblings, descendants, and/or in-laws) own the trust
  2. The trust was not formed for the specific purpose of investing in a particular fund and its trustees and persons granting assets to the trust are qualified purchasers

General partner (also known as sponsor, syndicator, operator, or key principal): The managing partner that is active in the business’s daily operations and may have personal liability associated with the operations of the business. 

Limited partner (also known as passive investor): Members of the syndication who invest their capital in exchange for participating in the profits of the business.  Limited partners typically have restricted rights for influencing how the business or assets are managed, and they typically have no legal liability related to the business. 

Returns and Distributions

Return hurdle: Any rate of return that, when reached, activates a disproportionate profit split. Common return hurdles include preferred return, IRR, and equity multiple. (For more on returns, see this article.) 

Preferred return (also known as pref): Preferred return is the threshold return, typically expressed as an internal rate of return (e.g., 8% IRR), that limited partners earn prior to the general partner’s participation in the profits of the business. 

Proforma: This document presents the expected financial results of the investment and its underlying assumptions.  The proforma calculates the expected returns investors will see including IRR, investment multiple, cash on cash return and other metrics.  

Promote (also known as carried interest): As a bonus for doing the lion’s share of work, this is a sum of the profits distributed to the sponsor if the pre-established return threshold is exceeded.

Waterfall: Describes the way partners in private equity investments share in the profit, referring to how the cash or profits from an investment flow down to the different parties involved in the investment.  The goal of the waterfall is to align the financial interests of all parties to the transaction.  There can be many levels or tiers to the waterfall but—generally speaking—each tier’s waterfall pool must be filled before the water (aka, cash) spills down the waterfall in the next tier. 

 Fees

Acquisition fee (and disposition fee): The upfront fee paid by syndication to the general partner for finding, evaluating, financing and closing the investment.  Similarly, a disposition fee is often paid when a property is sold.

Asset management fee: A fee paid from property revenues to the general partner for long-term, big-picture management and strategy of an asset. 

Property management fee: A recurring cost paid to any management company for overseeing day-to-day operations of a property.

Miscellaneous fees: Costs operators may charge the syndication based on the project’s specific circumstances (e.g., construction, refinance, etc.).

Documents

Private placement memorandum (also known as PPM or offering memorandum): A document that is provided to prospective investors to detail the offering, legal documents, subscription terms, conceivable risks, management plan, use of proceeds, and more. These are the documents an investor will use to evaluate and make an investment.

Partnership agreement (also known as operating agreement or limited partnership agreement): A document describing the detailed mechanics and parameters for operating the business.  It includes items such as voting rights, class of shares or membership, distribution of cash to partners, fees, legal remedies, and much more.  

Subscription agreement: A mutual, legally binding guarantee between a general partner (company) and a limited partner (subscriber). The company agrees to sell specific shares at a set price while the subscriber agrees to buy those shares. The document describes the process for committing to and submitting funds for the investment as well as some basic contact information; it may also ask for how investors would like to receive distributions and direct deposit information. 

K-1: A federal tax form that reports income, losses, dividends, and the capital account balance of a partner in a partnership.  This document is created for each partner in an LLC or LP and is an input to the partner’s personal tax return, similar to a W-2 from an employer.

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