Syndications

Multi-Family and Apartment Investing
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Syndications

Account Closed
Investor · Commack, NY · Member since 2014 · 43 posts · 7 votes

I'm looking to invest into a Multi Family Syndication deal and I noticed that the sponsor fees vary from about 1%-3%, depending on the deal. Is that fee usually based on the selling price or do they include rehab money too.  Example, a $2mm price and $500k rehab, would the sponsor fee be based on the $2mm or $2.5mm. Also, what are the other fees that are usually included?

Thanks!

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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
10y

Andrew there is not a standard rate.

Buying into a stabilized asset takes less intensity for a sponsor than a value add project.

Sponsor fee of 1% is very small unless the upside equity is large. Usually 3 points you see often.

50% of the upside is also common. For very large deals 25 to 30%. Every activity a sponsor does they should get compensated for because if they were not doing someone else would have to be paid to perform the function.

Some people might take less for fees but they have less experience which can put your capital at greater risk with the management and disposition of the asset. Managing it correctly during ownership helps to make sure investors are getting the projected cash flow returns as dividends and then there is a profit upon the sale.

For instance I make six figures per transaction usually brokering commercial real estate for clients buying directly. If I have to be a sponsor with more time invested my upside has to be significant otherwise it's not worth my time to do it.

I would focus on the experience and track record of the sponsor and quality of the investment you are buying into more so than how much fees a sponsor is making. Points up front and then for example where the sponsor takes a percentage of the cash flow ONLY after the investors have been paid. If there is not enough the sponsor doesn't get paid that month. Also if the property has lost value since acquisition then no fees should be paid out to the sponsor when selling. The sponsor wants the property to do well when they have the equity stake on the upside. Aligned interests for all is key on syndicated deals. Slant too much in favor of the passive investors the syndicator loses drive to perform. Too much in favor of the sponsor they also can get lazy and not perform as the upside is little to them.

So the sweet spot is in the middle. They make a good amount on the front end and then have to keep performing to see the larger payout at the end.     

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  • Kurt Brumfield
    Residential Real Estate Broker · Tylertown, MS · Member since 2015 · 61 posts · 27 votes
    10y
    Sponsor fees is usually on the purchase price. There are other ways you can generate fees. Such as, maintenance fees, & property management for example. Don't milk the deal dry thought.
    0Reply
  • Account Closed
    OP
    Investor · Commack, NY · Member since 2014 · 43 posts · 7 votes
    10y

    Kurt, I am the person looking to get into the deal but I noticed that other deals have different fees. some seem higher than others, I was just curious if there was a standard rate.

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    Andrew there is not a standard rate.

    Buying into a stabilized asset takes less intensity for a sponsor than a value add project.

    Sponsor fee of 1% is very small unless the upside equity is large. Usually 3 points you see often.

    50% of the upside is also common. For very large deals 25 to 30%. Every activity a sponsor does they should get compensated for because if they were not doing someone else would have to be paid to perform the function.

    Some people might take less for fees but they have less experience which can put your capital at greater risk with the management and disposition of the asset. Managing it correctly during ownership helps to make sure investors are getting the projected cash flow returns as dividends and then there is a profit upon the sale.

    For instance I make six figures per transaction usually brokering commercial real estate for clients buying directly. If I have to be a sponsor with more time invested my upside has to be significant otherwise it's not worth my time to do it.

    I would focus on the experience and track record of the sponsor and quality of the investment you are buying into more so than how much fees a sponsor is making. Points up front and then for example where the sponsor takes a percentage of the cash flow ONLY after the investors have been paid. If there is not enough the sponsor doesn't get paid that month. Also if the property has lost value since acquisition then no fees should be paid out to the sponsor when selling. The sponsor wants the property to do well when they have the equity stake on the upside. Aligned interests for all is key on syndicated deals. Slant too much in favor of the passive investors the syndicator loses drive to perform. Too much in favor of the sponsor they also can get lazy and not perform as the upside is little to them.

    So the sweet spot is in the middle. They make a good amount on the front end and then have to keep performing to see the larger payout at the end.     

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    13Reply
  • Account Closed
    OP
    Investor · Commack, NY · Member since 2014 · 43 posts · 7 votes
    10y

    Joel, Thanks for the great advise, much appreciated.

    0Reply
  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
    10y

    We typically have been taking 3-4% acquisition fee up front and 30% of the cash flow behind a preferred return to the investors.  We will then take around 30% of the profit after close.  As stated above there are many fees that can be tacked on which we do not.

    Asset Management fee

    Construction fee

    Disposition fee

    As @Joel Owensmentioned, it is important to have the interests of both the investor and sponsor in alignment.  Vetting your sponsor and the deal is key to a successful investment.

    11Reply
  • Matt McCourry
    Flipper/Rehabber · Myrtle Beach, SC · Member since 2014 · 95 posts · 35 votes
    10y

    @Account Closed, Probably the most important thing is the track record of the sponsor. 

    Remember this, the bigger portion of the pie you own the more negotiating power you have.  Sponsors are real estate guys, they are expecting to have to negotiate a little, just don't try to shave to much off the fees, especially if your return in satisfying...  As far as Acquisition Fees go, 1-3% of the purchase price is fairly standard, anything past 5% in my opinion is a little gluttonous...

    Good Luck!

    -Matt

    0Reply
  • Account Closed
    OP
    Investor · Commack, NY · Member since 2014 · 43 posts · 7 votes
    10y

    Thanks Matt, by the way I went to your website and filled out the contact sheet to find out more on what your company does. hope to hear from you soon.

    0Reply
  • Brian Adams
    Syndicator of Large Apartment Buildings · Glen Mills, PA · Member since 2009 · 1k+ posts · 1k+ votes
    10y

    @Account Closed have covered the ranges discussed in my opinion are fair. 

    For example I am currently putting my offering together on a 200+ unit deal I have under contract, raising $2.8 million, $100k minimum, investors get 60% of deal, charging a 3% acquisition fee, 1% asset management fee and a 1% disposition fee, simple allocation structure for cash flow and sale proceeds - investors receive a pref of 8% on cash flow (meaning I don't get paid a dollar of cash flow until investors achieve a yield of 8% on capital invested) and a 60/40 split on excess. Sale proceeds 60/40 split.

    One deal I did the structure was VERY confusing to everyone, meaning it had many IRR hurdle rates and the investors weren't certain on what they would get. I raised $2.5 million and the deal got funded, but I learned that if the investor is confused, it creates uncertainty and some didn't move forward.

    So now my approach is to keep things simple, good luck on your deal.

    12Reply
  • Account Closed
    OP
    Investor · Commack, NY · Member since 2014 · 43 posts · 7 votes
    10y

    Thanks Brian, good luck with your deal too.

    0Reply
  • Damian Leonard
    Investor · Fort Worth, TX · Member since 2014 · 60 posts · 89 votes
    10y

    @Account ClosedI agree with what these guys above are saying. I'd add that there are many other ways I've seen deals structured, from less experienced leads. Like they said, the more experience the deal sponsor is the higher their take is usually. I've seen deals, where the sponsor only takes 10-15% of the CF, no preferred rate, and no big acquisition fee. I don't think I have seen any above 3%. They usually are taking a .75-1.5% asset management fee, paid out of the cash flow. For my first deal as a lead sponsor, I wouldn't take above 15% and I don't like investing with experienced guys that take more than 20-25%, plus all of the extras that they can take. A deal sponsor that comes across as greedy, probably has a harder time raising funds than one that is more equitable to their investors. 

    1Reply
  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
    10y

    @Damian LeonardI am currently going into a deal where the sponsor will be taking 50%. Do I care as long as he gets close to the projected 80% return in 18 months.

    If you don't want to get in a deal where the sponsor is taking a large cut, that is each investors choice. Just as it is your choice to buy gas even though the oil company Execs are making Billions.

    Decide if the value is worth it to you, and don't fret about how much the person that made it happen is getting.  Better yet, set up your own deal for others to invest in.

    3Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    I make so much transacting directly as a principal broker with commercial clients.

    Example client buys a 4 million retail strip center putting 1 to 1.3 million down.

    If I syndicate there is much more work on my end and I do take a certain percentage equity to take it on or I WILL NOT do the deal.

    The reason is I would have diminished returns versus what I can close directly with clients. So the return has to be at or higher for the syndicate to be worth it to me or I am losing money.  

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    1Reply
  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
    10y

    I agree with @Joel Owensso if an investor insists on a lower cut for the sponsor, are they not taking the risk of a less experienced sponsor.

    Be sure to put a cap on your heart surgeons salary.

    I personally think that professional athletes are paid too much. So I have the option to boycott those events.

    0Reply
  • Damian Leonard
    Investor · Fort Worth, TX · Member since 2014 · 60 posts · 89 votes
    10y

    @Jeff GreenbergI understand and agree with you to a point, I don't fret over deal sponsor compensations so much. If I saw a deal like your example come across, I'd consider that a home run, but something that sounds more risky, and I'd want to know more about that deal sponsor, and what percent voting rights each person had, in case something went wrong. I'm assuming you have a great relationship with this sponsor. But I wouldn't assume that all of the passive investor out there that are getting into the business have that same kind of relationship established yet. 

    These syndications I'm involved with, have 5-40 investors per deal. Each investor does need to determine what and who they are comfortable with investing in. Part of my reason for personally not wanting anybody in a deal to have more than 20%, has to do with SEC Rule 506, "Bad Actor Disqualification" instances. If we have a sponsor, and he doesn't perform, we want to be able to vote him out as the asset manager. I've seen a case where the lead sponsor, mis-managed the asset, and put the asset in danger of foreclosure, when the bank called the other KP's and let them know. Luckily they were able to vote him out as the asset manager, and save the property, ultimately selling the assets and making the investors returns. I'd have to be super comfortable with a sponsor taking 50% if they had more voting rights than the other investors. I'm no lawyer, but this is some things they bring up to me. 

    I've not seen any apartment deals come across yet, where they are projecting such high returns in 18 months. Not to say they aren't out there, but I have only been investing in MF for one year. Each market is different.

    I'm working on getting my own deal, putting out offers currently and will be leading a deal someday soon hopefully. I'm still fairly new to apartment investing, just over a year into it and have been a passive or Key Partner in 5 deals, in three states, and 633 doors. I'm still a newbie I guess though. Still have lots to learn. Cheers!

    3Reply
  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
    10y

    @Damian Leonardthe deal I spoke of is not an apartment deal.  Voting rights and sponsors cut can be two different issues. Certainly investors should be able to vote out a manager, but only in extreme cases as you mentioned.

    A lot of trust must be earned by a sponsor. This trust is a highly prized and protected commodity.

    0Reply
  • Nino P.
    Investor · Buffalo, NY · Member since 2016 · 6 posts · 0 votes
    10y
    Hey everyone! Thank you all for sharing the knowledge. I am currently working towards assembling an investment group/syndicate with some close friends. From what I have been reading, I would be considered the sponsor for this deal. My question is how do I go from the current "yes I will absolutely invest with you" to actually putting it together? Should we form an LLC? What about percentages of ownership? Any recommended books on syndicating? ANY help is greatly appreciated. The plan is buy and hold.
    0Reply
  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
    10y

    The best next step is to hire an SEC lawyer to draft a PPM.  You really don't want to do this part without a lawyer.  Everyone is happy and friendly if all is going well, but if there is a problem you are the one without a chair when the music stops.  Close friends or not get it in a legal document.  The attorney will form the entity and wrap the operating agreement into the PPM.  Once you have that, you can open up a bank account and have them sign the subscription agreement and move money and commit to the investment.  The % ownership is all negotiable.  As a beginner you can expect to give them a pretty large piece to get them interested.  Are you putting money in?  The shares you get for your invested capital, IMHO, should be separate from the shares you get for being the sponsor and doing the work as a sponsor. In other words, if you put in half of the capital, you come in with equal shares as the other investors, plus the shares you receive as the sponsor.

    Principles of Real Estate Syndication by Sam Freshman will help you understand the process.

    5Reply
  • Maisa Vahedi
    Realtor · Dubai, UAE · Member since 2015 · 45 posts · 30 votes
    10y

    Very interesting reading all your comments! Thanks for the information everyone

    0Reply
  • Mark Choi
    Real Estate Agent · New York City, NY · Member since 2016 · 26 posts · 7 votes
    10y
    I'm almost too embarrassed to ask, because the terminology of the word "sponsor" is so different from what I know it as. But this post looks like the perfect place to ask my question: I always understood a "sponsor" to be the one who lends his credibility/credentials (accredited) in order to secure financing - usually the downpayment - for the syndication deal, much like the role of a co-signer on a conventional loan. However, in reading this forum post, it obviously isn't. Could anyone please clarify or elaborate? Thank you, as always!
    0Reply
  • Account Closed
    Investor · New York, NY · Member since 2016 · 105 posts · 118 votes
    10y

    @Mark Choi you shouldn't be embarrassed to ask anything on BP, learning is the whole reason the vast majority of us are on here!

    When it comes to deal syndication the Sponsor is the person putting together the deal.  That can involve not only finding the deal but also underwriting the deal, negotiating the terms with the seller, locking down the deal with a down-payment, due diligence, securing debt financing, selling the deal to investors and actively managing the asset post closing to guarantee the highest return for investors.  The fees already discussed is the compensation for the sponsor taking on all of these activities. 

    Some times some deals will have co-sponsors.  For example I am currently syndicating a deal where I am taking on all of the above activities but my co-sponsor is bringing in the capital that we need to co-invest with our investors and the liquidity and balance sheet required for the size of the loan needed from the bank.   In this case we split the fees 50/50.

    4Reply
  • David Thompson
    Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes
    10y

    If you sponsor, you are going to have to handle a decent amount of questions around fees. Actually, I pre-wire new investors in our syndicate deals before they get our PPM (Private Placement Memorandum) what to expect. I always talk about fees in advance even if they don't ask me because that will likely be on their mind when they read it. Our experience is keep it simple and streamlined. Acquisition fees and asset management fees of 1-3 % are common in the industry so we come in around 2%, not on low or high end. Preferred returns of say 8% favor the limited partners (investors) and are well received by investors. Above that preferred return splits are 70/30 (LP/GP). You see Tier 2 splits that can really complicate things where splits can change based on hitting certain hurdles (typically IRR %, etc). We don't do it and want to avoid complexities.

    Most investors I deal w/don't have a problem w/common fees and splits if they are few, clear and you have an explanation of why. If you have a solid track record to point to and they know the returns are "after fees" then it should not be an issue.  My favorite line for the tougher investor is, "if our deal only produced an 8% return" , the GP would never get a dime for all the work of finding the deal, negotiating it, spending money on the due diligence, putting their assets on the line to get a loan, managing the property manager and executing the business plan.  They get it.  That's why acquisition fees and asset management fees are common.

    5Reply
  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
    10y

    @Mark Choi

    The term sponsor in the syndication world is the GP running the deal

    In the lending world a sponsor is the loan enhancer. He signs on the loan and helps with the net worth, liquidity, and/or experience requirements.

    It does get confusing, but as long as you know the context you can understand it.

    1Reply
  • Mark Choi
    Real Estate Agent · New York City, NY · Member since 2016 · 26 posts · 7 votes
    9y
    Thanks Ruben Guerrero and Jeff Greenberg for your wisdom!
    0Reply
  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
    9y

    Gene Trowbridge uses the term "loan enhancer" for the person helping to secure the loan. Now if the industry would accept that term, things would be less confusing.

    1Reply
  • Steven TawreseyPro Member
    Flipper/Rehabber · Bainbridge Island, WA · Member since 2009 · 97 posts · 70 votes
    9y

    Hey Everyone. Thanks for the informative discussion! I'm a bit late to the party but hopefully some of you still see this.

    My question to you is this: What questions should I be asking a sponsor besides elaborating on their track record? 

    Also, can I get a sanity check on some numbers? Let's use some common terms in line with the discussion above:  8% preferred return, 75-25 pro-rata split of profits. If I have my math right, if I were to invest $100K into a deal with the assumptions below, I would get $70K in cash back after the refinance, I would have to leave $30K in the property, but I would get $6K yearly and have $96K in equity in the property. Sound about right?

    Purchase Price $ 2,500,000.00
    Renovation Cost $ 290,000.00
    Development Fee (1%) $ 25,000.00
    Transaction Cost (1%) $ 25,000.00
    Total Cost $ 2,840,000.00
    Capital Required (25%) $ 710,000.00
    Equity Contributed $ 100,000.00
    % Equity 14%
    % Owner (14% of 75% 11%
    ARV $ 3,500,000.00
    Total Profit if Refinanced $ 660,000.00
    8% Pref (8% of Capital) $ 56,800.00
    Profit Shared $ 603,200.00
    75% of Shared $ 452,400.00
    Total Eq. Partner Profit $ 509,200.00
    My portion = 14% $ 71,288.00
    $ left in deal $ 28,712
    NOI (est) $ 226,000
    Debt Service (est) $ 170,625
    Cash Flow $ 55,375.00
    My portion = 11% $ 6,091.25
    CoC Return 21%
    Equity at ARV (11% of 25%) $ 96,250.00 
    0Reply
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