Being a Key Principle or Key Sponsor

10 Replies

Hi,

Is anyone currently acting as a KP on syndicated deals or has done so in the past?  I am curious how one would look/underwrite that in terms of investing? what risks do you look out for in order not to do a deal?  Any insight would be appreciated.  Thanks.

Hi Vince,

Are you asking how a syndicator underwrites a deal? The answer is that you underwrite it the same way as any other deal: create a budget based on the current income and expenses and assumptions for the income and expenses after you acquire the property. In your budget, you should have a projected cash flow for each year. As a syndicator, you are raising money to cover the down payment. In return, you will likely offer the investors a preferred return. The cash flow is used to distribute the preferred return. Any additional cash flow is usually split between the syndicator and the investors.

Other differences are that you can charge an upfront acquisition fee for putting the deal together, which is a percentage of the purchase price paid to the syndicator at close. Additionally, you can charge an ongoing asset management fee, which is a percentage of the collected income. And, you will need to work with real estate and security attorneys to put together operating agreements, subscription agreements, and private placement memorandums.

In regard to risk, your projected cash flow needs to, at the very least, equal the preferred return amount you are offering your investors. Also, passive investors while qualify a deal using the internal rate of return (IRR) factor. So, the IRR for the project should meet or exceed their goal. Also, you are going to need to find a property management company who has experience managing the types of deals you plan to pursue.

This is very high-level. The process is much more involved, but this is a good start. Let me know if you have any more specific questions.

@Theo Hicks   Thank you for the reply.  No that is not what I was asking.  What I am curious about is if you were to be a KP only on a deal for a syndicated deal what would you look for outside of the typical underwriting analytics?  I am assuming history and track record of the GP (syndicator).  More so looking for perspective form people who have worked with or have been themselves a KP.  Thanks!

Ah. You are referring to the person who is signing on the loan - loan guarantor.

The first thing you want to know is if the loan is recourse or non recourse. If the loan is recourse, the bank can come after your personal assets if the asset goes into foreclosure. 

You'll want to know the estimated loan amount to determine if you meet the net worth (100% of the loan amount) and liquidity (~10% of the loan amount) requirements. 

You are correct that you want to know about the history and track record of the GP, but also their other team members. Specifically, their property management company. You wouldn't want to guarantee a loan for a first-time GP or a GP with a management company who has never managed a similar deal in the past.

Then, you want to know the compensation structure. Will you receive a one-time fee at closing, an ongoing fee, an equity stake?

@Theo Hicks @Vince Scolari  Are there any other benefits (financial or non-financial) to being a KP on a syndication deal? In the scenario of the one-time fee at close, is this separate from the acquisition fee (if there is one)? In the equity scenario, is the stake typically different than that of the GPs or the passives? Thanks.

Originally posted by @George Ozoude :

@Theo Hicks @Vince Scolari  Are there any other benefits (financial or non-financial) to being a KP on a syndication deal? In the scenario of the one-time fee at close, is this separate from the acquisition fee (if there is one)? In the equity scenario, is the stake typically different than that of the GPs or the passives? Thanks.

To get a commercial loan sometimes the lender requires you already have commercial loan experience. Kind of like trying to get your first job but they require job experience, it can become a Catch-22. So being a KP on a deal will give you some experience that will potentially help you when you later on when you're trying to get your own loan.

@George Ozoude yes there are.  Usually there is an upfront fee which comes out of the GP's fee's and they usually get a percentage of the GP pie.  So if the GP gets 1% aq fee and they are taking a 70/30 split a KP would get a fixed amount of the up front fee as well as part of the 30% the GP is getting.  It all depends  on the scenario though.  If you were the only KP on a deal you would get more but on larger deals sometimes many KP's are needed so that would adjust accordingly.  Lastly Like @Michael Le mentioned you get experience which you can put on your resume which helps with loans.

@George Ozoude Ultimately, the compensation structure for the loan guarantor is negotiable. If the syndicator is the loan guarantor, they will likely only take a % of the loan balance since they are already on the GP. Acquisition fee is something different, but I'm sure some syndicators who sign on the loan include that in the acquisition fee while others have a acquisition fee and a guaranty fee. If a 3rd party is the loan guarantor and that is their only responsibility, they will likely receive a % of the GP. 

Passive investors are on the LP, which is different than the GP. Usually, there is a profit split (along with a preferred return to the LP) - 50/50 to 90/10 (LP/GP) with 50/50 to 70/30 being the most common. So, the loan guarantor will get a % of the 30% or 50%. Hope that answers your question!

As for the other benefits, if you do not qualify for agency debt or have never gotten agency debt before (and therefore don't qualify), then bringing on a loan guarantor will help you get your Fannie/Freddie card, which makes subsequent loans easier to qualify for.