Debt vs Equity Syndications – Some Simple Differences
One of the many ways to invest in real estate is through a syndicate. A syndicate is essentially a group of investors who join together to accomplish an investment goal. There are two types of syndicates I want to cover today and those are debt syndications and equity syndications.
In a debt syndication each investor acts as a bank, becoming a private lender on the deal. The borrower uses those funds to execute a property transaction, often associated with development projects. The earnings and payments to investors (lenders) are predetermined, consistent, and understood upfront. Debt deals do have a shorter hold time than equity, usually between 6-24 months. In a debt syndication you earn return on the loan interest and fees. The investor does not have any ownership stake in the deal itself, but they do have the peace of mind knowing if the property is foreclosed, their investment is protected by the asset itself.
In an equity syndication you have part ownership in the property. By having part equity ownership you naturally are exposed to more risk, but you also get to participate in the upside of the performance! There is no cap on returns, there are tax benefits as well through depreciation due to partial owning the property as well. Equity deals have much longer holding periods, usually 5-7 years. Many syndicators offer equity deals because of the growth and upside.
We have seen a recent rise of debt deals over the last 12 months due to some economic changes, and the challenges syndicators are running into finding deals. But if your syndication sponsor takes their time, and finds the right deal, there are still great opportunities in the market for equity based syndication investments. If you have any questions feel free to reach out to us at Growth Vue.