Syndication with No Sponsor Equity Contribution

18 Replies

Hi,

Wondering if anyone has any experience syndicating deals with no sponsor equity contribution.  If so I would appreciate your comments on how to go about structuring the deal to provide investors "peace of mind" even though you as the sponsor are contributing little to no capital.

I have syndicated about 10 deals in the past but have always contributed about 10% of the capital myself.   Wondering how to get into larger deals where I may not be in a liquid enough position to commit capital.

Thanks in Advance!


@Account Closed I have done deals with none of my funds in. Very few of my investors ever asked and was clearly stated in the ppm. Investors invest because of trust in you regardless of having financial skin in the game.  Those that don't agree, don't invest with you. 

This is not to say I won't put money in, but it has not been a requirement. Certainly my funds are fully at risk up until the close.

Ruben Guerrero I say well done to @Jeff Greenberg for building enough trust with his investors and expertise to syndicate with no equity in the deal. That said, I find that arrangement to be the exception to the rule and in general a sponsor with no equity in the deal is a big red flag.

If you are short on capital, you might structure the deal such that any acquisition or management or other fees you receive as sponsor must be put toward your equity position. An investor might also be willing to loan you the capital which you can pay back over time with interest or perhaps through a preferred return via your waterfall.

@Account Closed , but I will add a little twist:  When holding initial conversations with investors, this is usually the 3rd or 4th question asked - "How much skin in the game will you have Ruben?"   

My Recommendation is to State "I invest (have equity, put money...) into EVERY one of my deals".  Although I do my best to invest the same amount as my minimum ask, usually $50,000, that's not always feasible.  However, as @Jeff Greenberg mentioned, it shouldn't be a requirement.  

If you disclose that so far you have already fronted the earnest $ (if applicable), paid for the initial attorney fees, PPM, etc., then it should not be a problem with your investors.  and if it is, well then this deal just isn't for them.  

I have ALWAYS had less than 50% of the minimum ask for my investors (again usually $50,000, so I've invested $25,000 or less) on each of my deals, and only once was it a problem.  And at the end of the day, I don't think I would have wanted this particular equity partner in the deal anyway!  

Besides, if you have done 10 in the past, and your Hero file/credibility site can show a solid track record of performance, I wouldn't waste another day asking Chuckleheads like us here on BP for our opinion.  

Surge ahead Ruben - this is the greatest land/property grab I have seen in the past 20 years, let's make hay while the sun is shining!  Oh, and gobs of $ for our investors who believe in and trust you that go along for the ride.  

Have a great weekend! 

Gentlemen, Thanks for your feedback thus far.  

Although I have already syndicated a number of deals the next deal I am looking to syndicate is around 3x the size of my average deal in the past.   My current investors trust me, and as @Jeff Greenberg , this is perhaps the most important aspect of any syndication.  However going forward I will need to tap into a new investor base, and my current liquidity is not enough to significantly contribute to deal.

@David Miller in the past I've never charged a acquisition or management fee for structuring a deal but I do like the idea of incorporating those fees going forward and putting them towards my equity position.  Out of curiosity, what are the typical acquisition and management fees being changed in today's environment?  

Borrowing the money is also not a bad idea.  Now that I think about it I can even splitting the fees with another partner that would be willing to front the sponsor equity.

Thanks again Gents!

@Account Closed   I look at it two ways.. either the sponsor has skin or they have an on going profitable business with real tan gable net worth or assets that you can see.

if they don't have either of those and its truly their great idea and the investors money then that's a risk to the investor.. IE things go sideways the sponsor has no real liquidity to help the situation or worse has personal financial issues because of lack of liquidity.

these deals are ONLY as good as the sponsor most of the time... and its a royal cluster is the sponsor goes under for some reason and you have a bunch of limited partners or investors who don't know each other trying to figure out how to save the deal.

And putting all your liquidity into the deal and having no personal resesrves is not wise either ya you put skin in but what if you have a bump in the road.

Ruben Guerrero depending on the investors and the deal size, i see acquisition fees between 0.5 to 1%. Management fees I see are often 0.5% or less (although I have seen a few where it is higher). Most of the syndications I work on are multifamily.

Originally posted by @Ruben Guerrero:

Gentlemen, Thanks for your feedback thus far.  

Although I have already syndicated a number of deals the next deal I am looking to syndicate is around 3x the size of my average deal in the past.   My current investors trust me, and as @Jeff Greenberg , this is perhaps the most important aspect of any syndication.  However going forward I will need to tap into a new investor base, and my current liquidity is not enough to significantly contribute to deal.

@David Miller in the past I've never charged a acquisition or management fee for structuring a deal but I do like the idea of incorporating those fees going forward and putting them towards my equity position.  Out of curiosity, what are the typical acquisition and management fees being changed in today's environment?  

Borrowing the money is also not a bad idea.  Now that I think about it I can even splitting the fees with another partner that would be willing to front the sponsor equity.

Thanks again Gents!

My two cents is you want to find out more information about syndications with Apartments these should be your go to guys. Promise not knocking any one else. I am pretty active here and in the turn key world and you start to know who some of the more active folks.

@Brian Adams

@Brian Burke

@Joe Fairless

Alex

@Alex Franks , I appreciate the mention.

I am similar to @Jeff Greenberg , I have put money into deals, but to date no investor has ever demanded it. 

Since I sponsor my own deals, the non-recourse lenders require that I have enough cash reserves available post close, so I need to keep my own cash liquid. Most investors I work with understand and get it.

@Account Closed , I am curious to know what kinda of deals you are working on where fees are so low? 

@David Miller I echo @Brian Adams question as to the size of deals that would take such a small fee.

First I am assuming that your reference to management you are talk about asset management not PM.  I can go along with that as I have not charged an asset management fee as of yet. As far as the acquisition fee being that low I feel that the service we provide is being under valued. If we don't find a deal, get it funded, and closed we don't get paid.  If offer a pref we may not get paid for a year or two. Unless we are closing a 20 mil deal, a .5% may not be worth the effort.

Transparency is the key.  If my investors are making money, they are happy that I am making money. That's what keeps me in business and them investing in multiple deals.

@Brian Adams is your 3% fee of the total cost?  I am working on a $3.7MM deal.  The acquisition cost is $375,000, construction cost $3,080,000, soft costs $137,000, Contingency $150,000 for a total cost of $3,742,000.  Would the 3% be of the $3.7MM number?  Do you collect it all at once (at closing or in phases).

How do you structure your returns? Do you typically offer a preferred return? If so what is the number? After it is achieved do you split 50% to a certain number etc?  I greatly appreciate any help and guidance you can give me in sponsoring a deal. Thanks!

.5 a percent is low.

Investors can want what they want but a syndicator can also command what they want or they will not do the deal.

I transact as a commercial principal broker. If I am only getting .5 I will just stay transacting and get 3% commission all day long.

A lot of has to do with also what is the equity split on the back end for the syndicator? If it is not a value add or equity growth deal through development then after resale costs the yield to a syndicator tends to not be that much. That is when the asset management fees and everything else is usually put in to give a decent yield.

For instance development deals. You can get passive investors and you have no loan carry costs like with a construction loan but the equity cost return to investors on the back end is high. I have seen some mix it up with equity and debt so that the sponsor does not give too much away on the back side.

You have to get the sponsor and investors to come together on what is fair and equitable for both to feel like it is worth their time. 

These deals should be win win without anyone feeling slighted.  Not every investor/deal/sponsor is a good fit.

@Katie Neason , awesome on your deal.

I haven't ever developed a new asset so I hope I can be helpful.

My acquisitions have been on existing product and the 3% acquisition fee was calculated on only the purchase price.

Also all my deals do have a component of a preferred return. The magic number seems to be an 8% preferred return on operating cash flows. The splits and allocations thereafter will range based on your track record, experience, how "juicy" your deal is, risk, team, hold period, and other factors.

Good luck!!

@Brian Adams Thanks for the reply! That is helpful. My past couple of projects have been smaller and the fee wasn't that big of a number, but it gets pretty big as the deals grow in size. It probably makes sense on a rezoning, development, construction deal to split the fee with half a purchase and half at substantial completion. Devil is always in the details. I appreciate having a sounding board as I muddle my way through it. It there a 'magic" number on the total return/exit side (15% 18% 20%)?  I am trying to back into what my piece could look like.  I envision this project having a 5 to 7 year hold period. 18 months will be construction and lease up, season for a bit and do a cash out refi or a sale. Not sure if that information helps bring clarity to your answer or not. 

@Katie Neason , magic number on returns will vary greatly depending on so many factors. 

I don't want to leave you guessing, based on my experience and speaking with other operators, anything 15+ will get investors interested.

Just wanted to follow up with you folks since things have escalated quite quickly on my end since I last posted.

A couple of weeks back I was speaking with a large investor of mine about a deal that I wanted to syndicate and could use his help with.  By the time I walked out of the meeting I had been sold by him on creating a managing an RE fund.  He's committing 50% of the capital and will syndicate the remaining allocation to complete the round.

Why the fund?  Well for my investor it makes more sense to invest in a blind pool with diversified assets than to evaluate each and every single deal.  Of course we agreed on a set of investment criteria that the fund will need to adhere to.  This is purely a preference of his and his friends.  Many of my other investors want to see each and every single deal and so this is not a suitable vehicle for them.    For me, this makes sense because I now have a committed pool of capital ready to be called when the right project comes along.   Not having to raise capital on a project by project basis will free up the team to chase more deals.  

Terms we agreed to (Thanks to those of the forum for the feedback!) 3% acquisition fee (which will be pledged as my equity), .05% management fee, 75%/25% split after the investors get their preferred return.   The fund covers all operational expenses (legal, compliance, audit, etc). 

In short, the fund structure is not exactly what I first sought out to establish but it is an intriguing alternative.  It will be challenging I am sure but in this business change is a constant and the path to growth is not always linear.    

Thanks again for all of your comments.   Hope to keep you guys posted on the progress on a separate thread more suited for topic.

@Account Closed

Congrats on finding an investor that is willing to help you with this structure. We do hotels and my partner has had a tough time with this as some just need to have a 15% equity contribution. For example, the returns for hotels are almost like 20%+ annually, but some investors are just not willing to even accept a 10% equity contribution as enough. So my partner has been searching still for investors that allow for a 10% equity contribution or less since he has to guaranty the loans and needs to show liquidity. So its actually pretty good that you achieved this. 

@Account Closed  
Congratulations on the change in direction. I think you have a lot of advantages to the blind pool. Happy to see a BPer out there hustling! Don't be hesitant to keep us all updated, I'm sure we would all like to follow your progression!

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