Weitz Commercial Real Estate, Legal & Economics Blog: Washington Syndication Agreements

The Basics of Commercial Real Estate Syndication:

Many investors don't have access to the purchase of commercial building either for financial reasons (typically a larger down payment will be required) or they simply don't want to manage a property, syndication have become a popular tool especially in the small to mid-size commercial market.

In doing so, it useful also for the founders/ investors to understand the syndication agreement and how a syndicate works in a Washington State Syndication Group.

In this article, we examine the typical elements of a syndication agreement an investor can expect to see and should review/ negotiate.

Purpose of the Agreement

Whereas the term sheet and shareholders’ agreement governs the relationship between the founders and the investors, a syndication agreement sets out the roles and responsibilities of the investors towards each other.

The syndication agreement has two main purposes:

1) it is aimed to facilitate the investment process by defining the roles of investors, their objectives, investments and the framework for the negotiations.

2) the syndication agreement sets out the guidelines for the post-investment activities of the investors.

A syndication agreement typically consists of two parts: One governing the acts of the syndicate while contemplating an investment and another governing the acts of the syndicate after the investment.

Preparing the Investment

The key pre-deal parts set out the role of the parties. These typically include who is the deal lead and how are the syndicate investors. Some of the syndicate members may also be appointed as co-leads or subject matter experts who assist the lead investor as agreed.

The lead investor has the authority to negotiate the deal on behalf of the syndicate. The underlying conditions for the authorization can be outlined in the agreement.

Besides negotiating the term sheet, the lead investor is typically responsible for representing the syndicate when preparing the shareholders’ agreement and the investment agreement.

The Role of the Lead Investor

The lead investor leads the negotiations on behalf of the syndicate. Other team syndicate members may support the lead in the negotiations, especially if certain subject matter know-how is required.

The preparation of the investment documents is typically also the responsibility of the lead. If this activity is outsourced to e.g. an outside law firm, the deal lead is still responsible for coordinating the work of the law firm on behalf of the syndicate.

Use of Experts

Every now and then the syndicate needs external expertise. Most commonly this is legal assistance relating to the shareholders’ agreement and investment documents but can include other services as well such contractor, accounting, and other professional relationships.

The experts may be chosen by the lead investor, who is then responsible for the coordination of their work. In cost compensation, different rules may apply if the investment is closed and if it falls apart (e.g. the company may cover the costs within pre-determined budget if the investment is made, but the investors cover the costs pro rata with their planned tickets if the syndicate decides not to invest).

Remuneration to the Lead Investor

If there is compensation for the lead investors, it should be agreed upon in the syndication agreement. And even if there is no compensation, it would also make sense to write that down in the agreement.

The remuneration for the lead investor can be e.g. lead investor fee, lead investor carry or compensation for the advisory or board work.

After the Investment

The second purpose of the syndication agreement is to set a foundation on the acts of the parties after the investment is made.

Voting in Shareholders’ Meetings

One of the benefits of making the syndicate formal via a syndication agreement is that it makes the syndicate one major shareholder instead of a bunch of smaller shareholders. Therefore, to fully gain the benefits of such arrangements, the syndicate members need to act unanimously.

Unanimous acting can be achieved by setting up a procedure in the operating agreement, where the syndicate members form their common understanding before a material decision is made and act accordingly in the actual decision making. E.g. it may be stipulated that all in all decisions that would require a qualified majority under the shareholders’ agreement, the syndicate members act as one if two-thirds of the shares held by the syndicate so vote.

Overall

A sound syndicate agreement helps to create a syndicate that is stronger than the sum of its parts. It also helps to mitigate the issues of the long cap table, when despite the number of investors they all act as one. Thus, having a syndication agreement in place can often be in the interest of both the investors as well as the founders; especially if the syndicate is large.

For more information on joining a King County Real Estate Syndication or Snohomish County Syndication, consider contacting a Puget Sound Commercial Real Estate Brokerage.

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Weitz Commercial Real Estate & Investing

Kirkland Snohomish