How to Legally Structure Real Estate Syndications | 2025 Guide

How to Legally Structure a Real Estate Syndication in 2025?

Every real estate investor eventually reaches a ceiling where their personal capital runs out. You’ve bought single-family homes, maybe a few small multifamily properties, and now you’re eyeing that 150-unit apartment complex. But there’s one problem: you need to raise money from other investors. That’s where real estate syndication becomes essential.

But here’s what most investors don’t realize: raising capital without proper legal structure isn’t just risky—it’s potentially illegal. The moment you accept passive investment, you’re selling a security, and that means you’re entering SEC-regulated territory.

Featured Answer: What is Required to Legally Structure a Real Estate Syndication?

To legally structure a real estate syndication, you must either register your security offering with the SEC or qualify for an exemption from registration. Most real estate investors use Regulation D exemptions (506(b) or 506(c)), which require comprehensive disclosure documents including a Private Placement Memorandum (PPM), proper investor verification, and clear communication of all risks to potential limited partners.

This comprehensive guide breaks down everything you need to know about legally structuring your first syndication, based on insights from Nick McGrew, a securities attorney at Polymath Legal who specializes in helping real estate investors lawfully raise capital.

Why Legal Structure Matters: Understanding Securities Law

Before diving into the mechanics of syndication, you need to understand a fundamental concept: when you’re raising money from passive investors, you’re selling a security.

According to securities law, an investment qualifies as a security when it involves an investment of money in a common enterprise with an expectation of profit primarily from the work of someone else. In simpler terms: if someone writes you a check and expects bigger checks back without doing any work themselves, you’re selling a security.

This matters because securities are heavily regulated by the Securities and Exchange Commission (SEC). You have two options: register your security (essentially going public, which is expensive and time-consuming) or qualify for an exemption from registration.

For real estate syndications, exemptions are the practical path forward. As Nick explains in the podcast, “We help clients with the exemptions because going public is very expensive, and if we’re talking about your standard real estate deal, the timeline just doesn’t work.”

What is a Private Placement Memorandum (PPM)?

The Private Placement Memorandum is your most critical legal document. Think of it as the contract between you (the General Partner) and your investors (Limited Partners) that outlines every aspect of the investment opportunity.

Your PPM serves several crucial functions:

Legal Protection: The PPM protects you from investor lawsuits by comprehensively disclosing all potential risks. Nick emphasizes this point: “My goal is to think of all the crazy bad things that could potentially happen and let the investor know, because while operators try to make money, all investments have risks.”

Investor Education: It ensures investors understand exactly what they’re getting into, including worst-case scenarios. This informed consent is essential for maintaining relationships and avoiding disputes.

Regulatory Compliance: The SEC requires specific disclosures, and your PPM demonstrates you’ve met these requirements.

Critical Disclosures Your PPM Must Include

Your PPM needs to address every foreseeable risk, no matter how unlikely. This includes:

Economic risks (recession, market downturns)
Market-specific risks (major employers leaving the area)
Operational risks (property management challenges, unexpected repairs)
Regulatory risks (zoning changes, new regulations)
Environmental risks (including climate change impacts)
Even global health crises (yes, COVID warnings are still included)

Nick’s firm asks clients a telling question: “What are the things that are keeping you up at night?” The answer to that question belongs in your PPM.

This comprehensive disclosure approach may seem counterintuitive. Won’t listing all these risks scare investors away? Potentially, yes. But as Nick explains, “We want these documents to scare the investors away. If that scares them away and they don’t invest, that stinks, but that’s good because the document did what it’s supposed to do.”

Understanding Accredited vs. Non-Accredited Investors

One of your first decisions in structuring a syndication is determining who can invest. This decision shapes which exemption you’ll use and how you’ll market your deal.

What Makes an Investor “Accredited”?

According to SEC regulations, an individual qualifies as accredited through income or net worth:

Income Test:

Individual: $200,000+ annual income for the past two years with expectation of the same or more this year
Married couples: $300,000+ combined annual income with the same consistency

Net Worth Test:

$1 million or more in net worth (excluding primary residence) for individuals or couples

Understanding your investor pool’s accreditation status determines which exemption works best for your syndication. If you’re working primarily with high-net-worth individuals, you have more flexibility. If your network includes friends and family who aren’t accredited, you’ll need to structure accordingly.

Regulation D Exemptions: 506(b) vs. 506(c)

Regulation D provides the most common exemptions for real estate syndications. Within this regulation, two primary options exist: 506(b) and 506(c). Your choice between these significantly impacts how you can raise capital.

Regulation D 506(b): Friends and Family Round

The 506(b) exemption works well for operators with strong existing networks who don’t need to advertise publicly.

Key Characteristics:

No general advertising or solicitation allowed
Can accept up to 35 non-accredited investors
Unlimited accredited investors permitted
Must have pre-existing substantial relationship with all investors
Lower investor verification burden

This exemption typically suits first-time syndicators raising smaller amounts ($1-2 million) from people they already know. As Nick explains, “For your first deal or so, it’s going to be less likely for you to get a random person that you don’t know already invested, so oftentimes people’s first deals might be 506(b).”

However, 506(b) comes with a critical limitation: you must have a pre-existing substantial relationship with every investor. You can’t advertise the deal on social media, your website, or in any public forum.

Regulation D 506(c): Scaling Through Marketing

The 506(c) exemption removes the marketing restrictions but adds investor requirements.

Key Characteristics:

General advertising and solicitation permitted
100% of investors must be accredited
No limit on amount raised or number of investors
Third-party verification of accredited status required
No pre-existing relationship necessary

Nick identifies 506(c) as his preferred structure when circumstances allow: “I like Regulation D 506(c). You can raise an unlimited amount of capital from an unlimited number of investors, your compliance requirements are internal, and it’s quick and streamlined.”

The speed advantage is significant. While most syndications take about a month to structure, Nick notes he’s set up a 506(c) offering in as little as eight days for clients who were organized and responsive.

Which Exemption Should You Choose?

Your decision comes down to three factors:

Your investor pool’s accreditation status: If most investors are accredited, 506(c) offers more flexibility
Your raise amount: Larger raises benefit from 506(c)’s unlimited potential
Your marketing needs: If you need to advertise publicly to find investors, 506(c) is your only option

For investors looking to scale beyond friends and family, building a real estate business while working full-time often means starting with 506(b) and transitioning to 506(c) as the business grows.

Investor Verification Requirements

If you choose 506(c), you’ll face stricter investor verification requirements. The SEC doesn’t allow self-certification—investors can’t simply claim they’re accredited.

Third-Party Verification is Essential

Nick strongly recommends using third-party verification services rather than handling verification yourself. “I always recommend for my clients to have a third party do it because that takes liability away from our client,” he explains.

If you verify investors yourself and miss something, you’re liable. If a CPA or specialized verification service provides a letter confirming accreditation status, you’ve taken “reasonable steps” to verify—which is what the SEC requires.

Third-party verification services are widely available and typically charge between $50-150 per investor. This small cost provides significant legal protection.

What About Non-Accredited Investors?

This raises an important question: should you even accept non-accredited investors?

From a purely financial standpoint, non-accredited investors represent more risk for potentially less capital. Nick’s perspective: “You definitely don’t want to take somebody’s last dollars. If they don’t have a lot of money to their name, every investment is a risk.”

Most experienced syndicators set minimum investments of $50,000-$100,000. Non-accredited investors typically can’t meet these minimums without putting themselves at financial risk.

The exception might be high-income professionals who haven’t yet met the time requirements for accreditation (they need two years of qualifying income). These investors may be practically low-risk even though they don’t technically qualify as accredited.

The Most Common Lawsuit in Real Estate Syndications

Understanding how deals go wrong helps you structure properly from the beginning. Nick sees one type of lawsuit more than any other: investors claiming they weren’t informed about something.

“The big one I would say is investors claiming that they were not informed of something, not disclosed,” Nick explains. “If a deal goes bad, we want to point fingers. If my money’s in it and I’m not getting all of it back, it’s not my fault, so I’ve got to blame somebody—and that’s going to be you, the operator.”

How Comprehensive Disclosure Protects You

This is why Nick focuses so heavily on disclosure. When clients face threatened lawsuits claiming inadequate disclosure, he simply points to the relevant section of the PPM. “Sure enough, they look at it and it goes away,” he notes.

Your PPM can’t prevent every lawsuit, but comprehensive disclosure dramatically improves your position if disputes arise. Courts and the SEC look favorably on operators who clearly communicated risks upfront.

What About Personal Injury Lawsuits?

While disclosure-related investor disputes are the most common legal issue in syndications, don’t forget about traditional property-related lawsuits. Gabe shares his experience: “We’ve been sued a couple times, but it was never our fault. We ended up winning all the cases, but it’s not fun.”

Proper insurance coverage, maintained properties, and documented maintenance procedures protect against these claims. For properties with specific risks (like sober living homes or student housing), additional liability protection becomes even more critical.

Step-by-Step: Setting Up Your First Syndication

Based on Nick’s expertise and the podcast discussion, here’s the practical process for structuring your first syndication:

Step 1: Assess Your Investor Network

Before choosing an exemption, honestly evaluate your potential investor pool:

How many people in your network could invest $50,000+?
What percentage are accredited vs. non-accredited?
Do you have pre-existing relationships with enough investors to meet your raise goal?
Will you need to market publicly to find investors?

Your answers determine whether 506(b) or 506(c) makes more sense.

Step 2: Choose Your Exemption

For most first-time syndicators, 506(b) works well for initial deals with friends and family. As you scale and build track record, transitioning to 506(c) opens marketing channels that accelerate capital raising.

Similar to how investors learn creative financing strategies like seller financing, mastering syndication legal structures is a progression—you don’t need to know everything before starting.

Step 3: Engage a Securities Attorney

This isn’t a DIY situation. While AI tools can generate basic documents, securities law is complex and state-specific. A specialized attorney like Nick ensures:

Your documents comply with federal and state requirements
All necessary disclosures are included
Your structure matches your specific situation
You understand your ongoing compliance obligations

Nick’s firm typically structures syndications in about 30 days, with expedited timelines possible for organized clients.

Step 4: Develop Your Offering Documents

Your attorney will prepare several key documents:

Private Placement Memorandum (PPM): The comprehensive disclosure document covering every aspect of the investment

Operating Agreement: Defines the relationship between general and limited partners, profit distributions, decision-making authority, and exit provisions

Subscription Agreement: The document investors sign to officially invest, including representations about their accreditation status

Investor Questionnaire: Collects information needed for compliance and investor verification

Step 5: Implement Investor Verification

If using 506(c), establish your third-party verification process before accepting any investments. Popular verification services include:

VerifyInvestor
Accreditation.io
North Capital’s VerifyInvestor platform

These services connect directly with investors, collect necessary documentation, and provide certification letters you can rely on.

Step 6: Create Your Investor Communication System

Beyond legal documents, successful syndications require strong investor relations. Develop systems for:

Initial investment processing
Regular updates (quarterly is standard)
Distribution processing
Tax document delivery (K-1s)

Many syndicators use investor portals or CRM systems specifically designed for real estate syndications. This infrastructure becomes increasingly important as you scale across multiple deals.

Beyond Syndication: Alternative Legal Structures

While Regulation D dominates real estate syndications, other options exist for specific situations.

Regulation A+: Mini-IPO for Larger Raises

Regulation A+ allows raises up to $75 million from non-accredited investors with some public advertising. However, it requires SEC qualification (a mini-registration process), financial audits, and ongoing reporting.

This exemption makes sense for very large projects or operators building funds, but the compliance burden and cost (typically $100,000+) puts it out of reach for most deals.

Regulation Crowdfunding: Small Raises from Many Investors

Regulation Crowdfunding permits raises up to $5 million from anyone through approved platforms. This democratizes investment but comes with limitations:

Individual investment caps based on income/net worth
Must use approved crowdfunding portal
Detailed disclosure requirements
Platform fees

For real estate, this works better for smaller projects or operators wanting to build a community of small investors.

Real Estate Funds vs. Deal-by-Deal Syndications

As you scale, you might consider a fund structure rather than syndicating individual deals. Funds allow you to raise capital once and deploy it across multiple properties without creating new legal structures for each acquisition.

This approach suits high-volume operators but adds complexity in terms of management, fee structures, and investor expectations. Most investors progress to funds after completing several successful syndications and developing institutional relationships.

Common Syndication Mistakes to Avoid

Learning from others’ mistakes saves time, money, and legal headaches. Here are the most common pitfalls:

Mistake 1: Advertising Without 506(c) Structure

Many new syndicators don’t realize that posting about their deal on social media, their website, or anywhere publicly accessible constitutes “general solicitation.” If you’re using 506(b), this violates securities law.

Even something as innocent as posting “working on an exciting new deal” with a link to learn more can disqualify your 506(b) offering. When in doubt, keep deal specifics private if using 506(b).

Mistake 2: Inadequate Disclosure

Trying to make your deal look perfect by omitting or downplaying risks creates liability. Remember Nick’s philosophy: let the PPM scare away investors who aren’t right for the deal. Better to lose an investor before they invest than face lawsuits after the investment goes sideways.

Mistake 3: Accepting Money Before Legal Structure is Complete

Enthusiasm from investors can tempt you to accept capital before your documents are finalized. Resist this temptation. Operating without proper structure, even briefly, creates serious legal risk.

Have all documents complete, filed (if required), and approved by your attorney before accepting the first dollar.

Mistake 4: Poor Investor Relationship Management

Legal structure protects you, but strong relationships prevent problems from becoming lawsuits. Regular communication, transparency about challenges, and treating investor capital with respect go further than any legal document.

Many disputes arise not from actual wrongdoing but from investors feeling left in the dark. Quarterly updates minimum—more frequent if significant developments occur.

Mistake 5: Ignoring State Securities Laws

While Regulation D provides federal exemptions, every state has its own securities laws (blue sky laws). Your attorney should file required notices and ensure state compliance. Some states require additional fees or filings, and operating without compliance can result in penalties.

Capital Raising Strategies Within Legal Boundaries

Once your legal structure is solid, the next challenge is actually raising the capital. The most effective strategies depend on your chosen exemption.

For 506(b) Offerings: Leverage Existing Relationships

Without ability to advertise, 506(b) success comes from:

Network Activation: Reach out personally to everyone in your existing network. This includes former colleagues, classmates, family, friends, real estate meetup contacts, and professional connections.

Referral Systems: Your existing investors know other potential investors. Build a referral program that compensates existing investors for successful introductions (while maintaining compliance with broker-dealer regulations).

Educational Events: Host private dinners or seminars for potential investors. You can’t advertise these publicly, but you can invite specific people from your network to learn about your investment approach.

One-on-One Meetings: Nothing builds confidence like personal interaction. Schedule coffee meetings or calls with potential investors to discuss their goals and how your investment opportunities align.

For 506(c) Offerings: Digital Marketing and Content

With 506(c), you can deploy broader marketing strategies:

Content Marketing: Create valuable content about real estate investing through blog posts, podcasts, and videos. This attracts interested investors while demonstrating your expertise. Similar to how the Real Estate Investing Club provides educational content, you can build audience and credibility.

Social Media Marketing: Share deal updates, market insights, and investment opportunities through LinkedIn, Instagram, and other platforms. Include clear calls-to-action for accredited investors to learn more.

Paid Advertising: Google Ads and social media advertising can target high-income individuals interested in real estate investing. All advertisements must include disclaimers about accredited investor requirements.

Investor Portal: Create a section of your website where accredited investors can register, review opportunities, and track investments. This professionalism signals you’re a serious operator.

Email Marketing: Build an email list of accredited investors and share regular market insights, deal opportunities, and company updates.

Remember that even with 506(c), you’re still subject to anti-fraud provisions. Everything you say or write must be accurate and not misleading.

Ongoing Compliance and Investor Relations

Syndication compliance doesn’t end when you close the deal. Ongoing obligations include:

Regular Financial Reporting

Most operating agreements require quarterly or annual financial reports to investors. These should include:

Property financial performance
Progress toward business plan milestones
Market condition updates
Any material changes or challenges

Tax Document Distribution

LLCs typically issue K-1 tax forms to all investors annually. Partner with an experienced CPA who understands real estate syndication tax reporting.

Material Event Disclosure

If something significant happens—a major capital expenditure, property damage, loan default, or other material change—you must inform investors promptly. Your PPM typically defines what constitutes a “material event.”

Distribution Processing

When your property generates cash flow or you refinance/sell, you’ll distribute proceeds according to your operating agreement. Accurate record-keeping and timely distributions build trust for future deals.

SEC Form D Filing

For Regulation D offerings, you must file Form D with the SEC within 15 days of first sale. Many states also require Form D or similar notice filings. Your attorney typically handles these filings, but you’re responsible for ensuring they’re completed.

When Capital Calls Become Necessary

Not every deal goes according to plan. Sometimes properties need more capital than originally projected—for unexpected repairs, market downturns affecting income, or refinancing shortfalls. This requires a “capital call” where you ask existing investors for additional funds.

Nick notes he’s seeing more capital calls and loan restructures in the current market cycle compared to previous years. “I have worked with a lot of clients, and unfortunately some of theirs are not doing well, so definitely seeing a lot more capital calls or trying to restructure loans,” he explains.

How to Structure Capital Calls Legally

Your operating agreement should address capital call procedures:

Under what circumstances can you call capital?
What happens if an investor can’t or won’t contribute?
Do investors lose equity or face other consequences for non-participation?
Can new investors participate, and at what terms?

Capital calls test investor relationships and your communication skills. Transparency about why additional capital is needed and how it will solve the problem is essential.

Real Estate Development Legal Considerations

For investors moving into ground-up development or real estate development, additional legal complexities arise.

Nick took a real estate development executive certificate program at USC, which “takes you through the whole development timeline in about six weeks—from site location to financing to actual construction, permitting, all that sort of stuff.”

Development syndications face additional risks:

Construction delays and cost overruns
Permitting challenges
Environmental issues discovered during development
Market changes between project start and completion

These heightened risks require even more comprehensive disclosure in your PPM and potentially different fee structures to compensate for increased complexity and risk.

Scaling Your Syndication Business

After completing your first successful syndication, scaling becomes the next challenge. Success leads to more opportunities, but also more complexity.

Building Systems and Team

As you move from one deal to three, five, or ten deals, you need systems for:

Investor communications across multiple properties
Financial reporting and accounting
Property management coordination
Deal sourcing and underwriting
Legal and compliance tracking

Many successful syndicators eventually hire:

Asset managers to oversee property performance
Investor relations specialists to handle communications
Acquisitions team members to source and underwrite deals
Administrative support for document management and compliance

Transitioning to Fund Structures

Multiple simultaneous syndications create operational burden. At some point, a fund structure becomes more efficient. This allows you to raise capital once and deploy across multiple acquisitions without creating new legal entities for each property.

However, funds add complexity:

More sophisticated investors expect institutional-grade reporting
Fee structures become more complex (management fees plus performance fees)
Asset allocation decisions affect all fund investors
Exit timing becomes less flexible

Most operators wait until they’ve completed at least 3-5 successful syndications before considering a fund structure.

Geographic Expansion

As your business grows, you might expand into new markets. Each state has its own securities regulations, so geographic expansion means additional compliance considerations and potentially different legal structures for different regions.

Understanding which markets offer the best opportunities—whether that’s affordable housing, shopping centers, or industrial outdoor storage—requires both market research and legal preparation.

Lessons From the Field: Stay in Your Lane

While this guide focuses on legal structuring, Nick shares an important lesson from his own investing experience that applies to everyone in real estate: stay in your lane.

“I had some Airbnbs and invested in them and they did not do very well,” Nick admits. “The big thing I learned from that is stay in my lane—do the stuff that I know. If it’s stuff that I don’t know, just give cash to the expert and let them ride with it.”

This wisdom applies whether you’re syndicating multifamily properties, experimenting with virtual wholesaling, or exploring probate real estate. Every real estate strategy has nuances, and jumping into unfamiliar territory without proper education creates unnecessary risk.

When you do decide to learn a new strategy, invest in proper education first. As Nick recommends for those interested in development, formal programs like USC’s real estate development certificate provide comprehensive knowledge faster than trial and error.

Conclusion: The Path Forward

Structuring your first real estate syndication feels overwhelming. The legal requirements, documentation, and compliance obligations are complex. But thousands of real estate investors have successfully navigated this path, and you can too.

The key takeaways:

Understand you’re selling a security and need either registration or an exemption
Choose between 506(b) and 506(c) based on your investor pool and marketing needs
Disclose every foreseeable risk comprehensively in your PPM
Use third-party verification for accredited investor status if using 506(c)
Hire experienced securities counsel rather than attempting DIY structures
Build strong investor relationships through transparency and regular communication
Stay in your lane and master one strategy before diversifying

The legal structure protects you, your investors, and your business. It’s not an obstacle to overcome but a foundation that enables sustainable growth.

Once your first syndication is properly structured and successfully executed, you’ve created a blueprint for scaling your real estate investing business far beyond what your personal capital could achieve. That’s when the real wealth-building begins.

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