Syndication: What to Know

The “ins” and “outs” of syndication in the equine industry

If you’ve been around horse ownership for any amount of time you have likely encountered some form of syndication. Syndicates are formed when two or more people own a fractional interest in a horse often through a co-ownership agreement or through an LLC. Syndication allows for multiple investors in highly valuable horses such as racing, dressage, show, breeding, and in recent years rodeo horses. This type of ownership structure can be a great way for owners to share the risk and costs associated with high value horses while at the same time allowing for multiple owners to share in the thrill of the equestrian world.

Syndicates are often structured through a co-ownership agreement or an LLC. Regardless of the ownership structure, there can be tax consequences and legal obligations so you should consult with a
trusted tax advisor and attorney prior to investing in or starting a syndicate.

A co-ownership agreement is a syndication agreement or contract between two or more individuals. The agreement defines the fractional interests, duties, and obligations of the co-owners and the manager. This type of agreement often does not have liability protection and the co-owners can be personally obligated for the costs and risks associated with the horse for the duration of the agreement or until the horse is sold. Additionally, if there is no formal structure, the agreement could be considered a legal partnership where any co-owner can incur debt on behalf of the syndicate and all the co-owners then become personally liable for that debt.

A syndicate LLC is structured very similar to a typical LLC with members owning an interest in the LLC with a designated manager to handle the day-to-day operations. The benefit of using an LLC to form the syndication is the liability protection afforded to LLCs. While the LLC operating agreement will have standard legal language, it will include specific language related to equine syndication where the members have common interests and rights. Depending on how the LLC is structured, investing in a syndicate LLC could be considered a security under the Securities and Exchange Commission and regulation under the Securities Act of 1933 and state securities laws.

Before investing in a syndicate, do your due diligence prior to signing on the dotted line. Review the business plan and syndication agreement and/ or operating agreement to be sure you understand
the financial obligations as ongoing investment may be required. Request financial reports that show not only existing costs but projected expenses over the term of the syndication. Review up-to-date earnings and projected future earning potential for the horse so that you can evaluate your return on investment.
Consider whether your expectations are in line with the syndicate, for example, how involved do you want to be in the day-to-day? Do you want to attend training? Are you allowed to visit the barn? What
is the plan for training, who is the rider, and how is veterinary care for the horse managed?

Be sure that the manager is responsive and has experience managing high value horses and complex syndicates. Look for potential red flags that might signal problems with either the manager or the syndicate itself. If the manager is not responsive or does not provide complete information such as what horse the syndicate will own or how many investors there will be, there could be an issue. If there is an urgency and the manager is pressing for quick investment, this could be a signal that there are underlying problems with the syndicate.

To form a syndicate, the first step is to create a solid business plan detailing a clearly defined goal (cost/risk sharing, income generation, breeding, etc.) with the help of both legal and tax advisors. The business plan should include a detailed financial plan describing how and when the horse will earn income along with a total anticipated income through the term of the syndicate along with the associated costs such as veterinary bills, the horse’s failure to perform, boarding, training, insurances (liability, medical, death), equipment and tack, farrier, or other financial or performance problems. How many owners do you want participating in the syndicate, and what level of involvement do you want from those owners?

A well-planned syndicate will have owners whose goals are aligned and share commons rights and interests. If you are not experienced with a syndicate, consider hiring a professional with experience
developing successful syndicates. Consult with knowledgeable attorneys and tax advisors to prepare the legal and financial documents.

I have heard it said that joining a syndication is about the experience of participating in a highly competitive equine journey, not about making money. Most people invest in a syndicate for the love of the horse and the competition. If you decide to invest in a syndicate or are considering syndicating your horse, make sure to consider all the potential options, risks, and most importantly, the people you want with you along the journey. If done properly, a syndication can be an amazing experience for both the owners/investors and the riders where all share in the joys and sorrows of training and competition and encourage each other along the way.

Written by Crystal McDonough for The WRANGLER

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