Navigating Conflicts of Interest in Real Estate Syndications: Key Legal and Compliance Considerations

Real estate syndications present compelling opportunities for both sponsors and investors — but with those opportunities come serious legal responsibilities. One of the most critical areas sponsors must manage is conflicts of interest, which can arise from employment relationships, control of related businesses, or overlapping roles in real estate ventures. In this article, we break down common conflict scenarios, compliance pitfalls, and best practices to help sponsors protect their ventures — and their investors.

Common Sources of Conflicts in Syndications

1. Employment-Based Conflicts

Sponsors who hold full-time positions — whether at investment firms, private equity funds, or real estate companies — may face limitations or outright prohibitions on participating in outside ventures. These employers often have policies or contractual provisions (such as non-compete clauses or restrictions on external business activities) to prevent competition, protect confidential information, or avoid reputational risk.

Before launching a syndication, sponsors should:

• Carefully review employment agreements for non-compete, exclusivity, and confidentiality provisions.
• Obtain formal written approval from their current employer when required.
• Avoid any real or perceived use of employer resources or insider knowledge in connection with their syndication.

2. Related-Party Business Interests

Sponsors often own or control affiliated businesses — such as property management companies, construction firms, or brokerage entities — that may be engaged to service the syndicated project. While this vertical integration can bring operational efficiency, it also raises red flags.

For example:

• If a sponsor’s property management company oversees the asset, they may receive compensation beyond their GP interest, potentially misaligning interests with investors.
• If the sponsor also acts as a broker and earns commissions on transactions, investors may question whether deals are being selected for their merit or the sponsor’s financial benefit.

3. Conflicts Within the GP Structure

Sponsors juggling multiple syndications or investment vehicles may also encounter conflicts when competing deals arise. If another project controlled by the sponsor competes for capital, opportunities, or management attention, this can create fiduciary tension and investor skepticism.

Strategies to Mitigate Conflicts and Ensure Compliance

Sponsors can — and should — take proactive steps to reduce legal exposure and preserve investor confidence.

Key risk management strategies include:

Transparent Employer Communication

Sponsors should be upfront with their employers about outside ventures. Formal approvals and clear documentation go a long way toward avoiding future disputes.

Robust Disclosures to Investors

All potential conflicts must be clearly disclosed in the offering documents — particularly in the private placement memorandum (PPM). These disclosures should cover:

• Employment affiliations
• Ownership in related businesses
• Fees or compensation arrangements with affiliated entities
• Involvement in competing ventures or overlapping roles

Fair and Documented Related-Party Transactions

If a sponsor or GP engages affiliated service providers, those relationships must be fully disclosed to investors as material conflicts of interest. While not always legally required to be priced at arm’s-length market rates, failing to do so may increase legal and fiduciary risk unless expressly disclosed and consented to by investors.

Final Thoughts: Why It Matters

Properly managing conflicts of interest isn’t just a legal necessity—it’s a foundation for trust and long-term success. Real estate sponsors who prioritize transparency, adhere to compliance best practices, and engage experienced legal counsel demonstrate professionalism and build confidence with their investor base.

In today’s competitive and heavily scrutinized investment environment, aligning the sponsor’s incentives with those of the investor isn’t just good ethics—it’s smart business. Our team at Sosnow & Associates PLLC is here to guide sponsors through the complexities of syndication law, ensuring their deals are structured to succeed.