So what should you charge as the Managing Partner of a syndicate?

6 Replies

I was just listening to the latest podcast and was intrigued to hear the guest sometimes did bigger syndications and actually didn't put money in.  They got 15-20% of the deal just for putting it together and running it.  I wanted to see from some of you bigger guys if that's the exception.  I was curious what some of you are 'charging' for finding the deal and your organization and management of the syndicate over time.  Specifically do you give the investors a certain guaranteed payout and then keep anything over that?  Do you only take your extra share of cashflow after they are 100% paid back.  Is taking 15-20% normal or high.  Any feedback would be appreciated.

I have been looking at syndicating for commercial assets.

I already transact and am an investor myself. On the smaller deals taking 30 to 35% of the deal is common as the equity spread is smaller for the upside.

Larger commercial deals the 20% is common.

The are single property syndicates where a pool of investors agree to go in on a single property. The downside is you need a long lead time while under contract to close and raise the money and it's a hard sell to a seller. It's easier to raise money for a single property because the investor has control in what they invest in.

I like the blind pool because the investors are giving the money for the fund upfront for a specific return and I can decide if a deal makes sense based on my experience and can close a property fast. That is important when finding deals to buy is that speed is the key and any indecisiveness can lose the property for you. 

     

Medium allworldrealtyJoel Owens, All World Realty | [email protected] | 678‑779‑2798 | http://www.AWcommercial.com | Podcast Guest on Show #47

Thanks, Joel.  When you do a deal and take the 20%, what cash on cash return do the investors typically accept.  When they can invest in a liquid REIT and make 7-8% with relatively minimal risk, what do you need to make sure they make AFTER you take your 20%?

@Mark Mosch  Yes, these deals are commonplace. 

Look into IRR (Internal Rate of Return). If you are unfamiliar with it there are a lot of posts about it here on BP. In essence this is the number that many sophisticated, passive investors in a syndicate look at. Most syndicators that I know work on getting this number into the teens for it to become an attractive deal to raise capital.

As far as the equity split, it depends.  Some sponsors charge fees such as acquisition fees, management fees, refinancing fees, disposition fees, etc....  These are some of the ways that the syndicator gets paid for creating the deal.  Many times a preferred rate of return is in place as well.  Let's say it is 8%.  This means that the passive investors have to make at least 8% cash on cash before you as the sponsor get to share in the cash flow.  A structure might look something like 8% preferred rate with a 50/50 split on cash flow above that.

The equity piece depends on the deal. I know a guy who is working on commercial development projects and he gets 50% of the equity. The reason it is so high is because ground up development is very time consuming and difficult. The sponsor of the deal is required to spend a lot more time and have a lot more knowledge than say acquiring a stabilized, cash flowing asset. His IRR numbers are extremely high for his deals but clearly new development carries a lot of risk. This is how and why he carves out such big pieces of equity and still delivers high returns to his investors.

Originally posted by @Mark Mosch:

Thanks, Joel.  When you do a deal and take the 20%, what cash on cash return do the investors typically accept.  When they can invest in a liquid REIT and make 7-8% with relatively minimal risk, what do you need to make sure they make AFTER you take your 20%?

It's important to note too that just because somebody invests in a REIT doesn't mean they are making an easy 7-8%.  REITS are heavily tied to the overall stock market whereas PPM deals aren't.  There are a lot of moving parts in a REIT that affect returns.  This is why private deals are attractive to investors compared to just going with a REIT.  

Normal is in the eye of the beholder.  Are you kissing the note?  Are you finding stellar deals or just good ones?  What services are you providing and what fees are you taking in addition to the promote?  Are all of what would normally be fees baked into your promote?  There are a lot of variables here.  The product type also matters a great deal.  

Medium realstarter2Bryan Hancock MBA, RealStarter | [email protected] | (512) 827‑9638 | https://www.realstarter.co/Home/BH

@Joel Owens @Nick Keesee how exactly would you recommend setting up a syndicate like this? I have some investors that are looking to invest in Tampa, FL and I believe setting up a syndicate would be a great option for them and myself.