How do you determine investor syndicate compensation?

Question

I'm looking for some resources to help me determine the compensation to investors in a syndicate.

Attached is an example of what I found from someone else.

Since I'm looking for my first deal, I would be contacting people I know and pooling the money together. I'm unsure if the above example would make sense in this situation, but I'm primarily looking for a resource I can use as a guide to help me determine the compensation I would come up with from those I borrow from.

Brody Garcia · Answer

I am currently starting to raise capital and I did what Taylor recommends here. Talking to your investors about what they are looking for and what their goals are. Good Luck with the Raise!

Zach Alms · Answer

Lots of good books and podcasts out there to learn more on this. I'd be weary of investing other people's money until you have a solid knowledge base on the topic.

I'd say a couple good books to start with are Brian Burke's - "The Hands-off Investor" and Joe Fairless - "Best Ever Apartment Syndication Book"

Account Closed · Answer

Investors' compensation (aka returns):

Other than the fixed preferred return (if any), the rest of the investors' returns are based on the deal's performance (projected via an underwrite).

GP's compensation (aka fees and promote):

These are tied to the deal's performance as well and are always disclosed in the GP's Investment Offering, and deal's subscriptions documents (PPM and Operating Agreement).

Let me know if you more clarification is needed.

Scott Mac · Answer

Hi Eric,

Are you intending to borrow or to have investors?

Investors are "similar to" partners, part owners.

Anyway, I'm going to go a bit deeper on this than the numerics which others have covered so well.

You can pick any numbers you want, but the key is being able to achieve those numbers.

Being "Deal Number One", some people must bring on co-sponsors/principals to the team to qualify for the loan (as a lender requirement).

So know the requirements of your loan early on in the process.

And may you hit 400 home runs in your career, with this being the first!

400 Home runs  https://www.youtube.com/watch?v=bmD0vMnnjuA

Good Luck!

Brock Mogensen · Answer

Those returns look pretty standard in today's market.  Syndicated deals can be structures so many different ways though. Preferred returns, equity splits, hurdle rates, preferred shares..list goes on. I suggest keeping your structure as simple as possible on your first one.

Ronald Rohde · Answer

These returns look like value add MF. I even think the first block is misleading, Cash Returns shouldn't include exit/sale proceeds. I care about distributable income on monthly basis. Buying now, you may not be able to sell in 5 years. What can I eat in the meantime?

Double your money is pretty standard. I do industrial raises and we're higher CoC, higher IRR, etc.

Taylor L. · Answer

The best way to learn! Just ask. Your investors will love to tell you about their goals and targets.

Chris Seveney · Answer

Those are ranges. Your PPM will need to provide the specific details of how the money flows, who gets paid first, how much etc. Then the above is based on model simulation of where the targets are. Returns will vary with the level of risk - for example if there was a "crypto currency fund" that targeted 15% or a US Treasury Fund targeting 4%, most would be like of course 15%, but risk is also a major key component.

Typically if its a multi family deal its a 6-8% preferred return and 80% upside going to the investors. Thats aruond the standard in the industry.

Taylor L. · Answer

It's important to make sure you're keeping terms straight with regards to investor returns, borrowing money vs investing money, and more.

I believe I recognize the slide you included and the deck it came from. If I'm not mistaken that is an equity deal, and from the context of your post it sounds like you're probably offering equity investment. So it's important to bear in mind that you're not borrowing investor funds, they're investing in equity. It's also not compensation, investors earn a return on their investment. Maybe a bit pedantic, but those terms can be very important to make sure everyone understands.

It can be good to look at other deals in the market to know what others are aiming for. Be sure to bear in mind your investor base, though. Their target returns may be higher or lower than what other deals offer in the market.

My recommendations would be to keep looking at other sponsors' deals to get an idea of what the market is offering. Also speak with your investors to get clarity on what their investment goals are.

Justin Moy · Answer

If you're looking for returns for the passive investors then I'd say a lot look to double their money in 5 years, which ends up being an average annual return of 20%. Generally we're comfortable with projecting 15%+ average annual depending on how conservative the underwriting is.

Between a 12 - 18 IRR depending on the business plan, location, and type of property.

If it is a cash flow deal, I'd say stabilizing at 5.5% then growing from there is probably the minimum cash on cash investors would like to see, so your annual cash on cash doesn't seem too far off.

How do you determine investor syndicate compensation?

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