Regulation and Technology Advance Investor Liquidity in Real Estate Syndication

Written by:

Steve Marcinuk

Date:

12 May 2025

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In traditional real estate syndication, investors face a stark reality: their capital is locked up for years with virtually no exit options until the property sells. This lack of liquidity has been a significant barrier for potential investors and a major friction point for syndicators raising capital. Recent regulatory developments and technological innovation are now addressing this longstanding issue.

“The issue that always bothered me is that the sponsor and the LP interest have never really been fully aligned,” reflects Michael Anderson of PREIShare, capturing a fundamental challenge that has long plagued real estate syndication.

The Fundamental Misalignment in Traditional Syndication

For decades, limited partners in real estate syndications have been told a half-truth: “You’re investing in real estate, and real estate isn’t liquid.” But as Anderson points out, “The truth of the matter is, they didn’t invest in real estate. They invested in an entity that owned the real estate. And that’s a security. And that should be liquid.”

This distinction is crucial. When investors needed liquidity, whether for medical emergencies, educational expenses, or other opportunities, they were often left with limited options: either the sponsor would buy them out (creating potential conflicts of interest), or they could try to sell to other existing investors in the deal.

“I fielded a number of calls like, ‘My wife’s in the hospital, and insurance is not paying all of her expenses. I would like to cash out my assets with you guys and pay her hospital bills,'” Anderson recalls. “The bottom line is that investors should have had control of that asset.”

Regulatory Evolution: How Rule 506(c) Changed the Game

The Securities and Exchange Commission’s Regulation D has traditionally governed private placements, including real estate syndications. Under Rule 506(b), syndicators could raise unlimited capital from accredited investors but were prohibited from general solicitation and advertising.

“When that law was written and adopted, I don’t think anybody really thought through the process of what happens if somebody wants to get out, and what their options are,” Anderson observes.

The introduction of Rule 506(c)—commonly referred to as Regulation C—has significantly changed this landscape by allowing general solicitation and advertising, provided all investors are verified as accredited.

“Now, with Reg C, which differs significantly from what I worked with during most of my career, we recognize the possibilities of marketing to a broader audience under certain conditions,” Anderson notes.

This regulatory shift has made capital raising more efficient for syndicators. “The syndicators we’re working with say it’s much easier to do a raise because they can address the liquidity concern upfront,” Anderson explains. “When I was raising capital, seven out of ten potential investors would back away as soon as I mentioned the investment wasn’t liquid. Now, that number has dropped significantly.”

Technology Enabling Secondary Markets

Alongside regulatory changes, technology platforms are creating viable secondary markets for LP interests. PREIShare’s listing hub allows investors to buy and sell passive real estate interests, subject to regulatory requirements.

“We started with just the idea that we would build a marketplace,” Anderson explains. “We’re working with existing syndicators to help them do their raises, but in the process having them change their operating agreements to allow for people to move in and out of assets.”

This technological innovation required a significant pivot for Anderson’s team: “After about a year, we realized that we’re not really a real estate company. We’re a technology company with real estate as a byproduct.”

The Compounding Advantage for Both Parties

The combination of regulatory flexibility and technological innovation enables a fundamental shift in how syndications are structured and managed. Rather than the traditional model of acquiring properties and selling them every few years, syndicators can now consider longer-term holds with interim liquidity options for investors.

“A nine-digit neighborhood is a very nice place to be,” Anderson explains, referring to the advantages of building larger portfolios with longer-term horizons. “You can continue to grow rather than turning the assets every four or five years.”

This approach offers significant benefits to investors as well: “For the investor, they get to compound their growth, and it changes the dynamics dramatically. The returns over a six-year hold period, if you just left the money in there, might give you a 20% internal rate of return. But if you took that cash out once or twice in that period and reinvested it, that return could go to 30% or maybe 10x versus 2x over the same period.”

The Return on Equity Problem

One of the most compelling reasons for addressing liquidity relates to the return on equity problem that emerges as properties appreciate.

“It’s amazing how fast you go from maybe a 9 or 10% cash-on-cash return to a return on equity that drops within a year or two based on market conditions,” Anderson points out. “As properties appreciate and debt gets paid down, the effective yield on the current value diminishes to maybe 3 or 4%.”

In traditional syndication, the only solution was to sell the property and redeploy capital. With enhanced liquidity options, investors can potentially sell a portion of their appreciated interest, effectively rebalancing their portfolio without forcing a sale of the underlying asset.

The Path Forward: Education and Adaptation

Despite the promising developments in regulation and technology, significant educational barriers remain. “The challenge is educating attorneys, investors and sponsors that there might be a better tool out there than what we’re using,” Anderson acknowledges.

As the real estate syndication industry continues to evolve, several trends are likely to accelerate:

1. Increased adoption of Regulation C offerings with explicit liquidity provisions.
2. Greater integration of technology platforms that facilitate secondary trading.
3. Longer hold periods for properties with interim liquidity options for investors.
4. More sophisticated investor education around the trade-offs between liquidity and returns.
5. Emergence of specialized marketplaces for trading limited partnership interests.

These developments point toward a more mature, efficient market for real estate securities, one that better aligns the interests of sponsors and investors while preserving the fundamental advantages of real estate as an asset class.

The industry stands at a critical juncture where education and adaptation will determine which syndicators succeed in this evolving landscape. For those embracing these changes, the benefits include streamlined capital raises, extended asset management periods, and most importantly, truly aligned interests with their investment partners.