I get requests from friends to invest and manage their investment in a multi family building. My question is:
1. What rate of rent do you charge as management fee for yourself, assuming you still contract with a 3rd party property management company? For example, charge 8% of which a larger portion goes to the property management company and smaller to you?
2. What % of ownership do you retain for yourself, even if you did not put any money down, to grow the value of the property? For example, own 20%, but such ownership is only above the purchase price valuation?
Feedback from experienced syndicators would be appreciated.
Typically we own 30-40% of the deal and are considering a 1-2% asset management fee.
@Arun Iyengar as far as "asset management" fee it's what @Jeff Greenberg said, 1-2%. With regard to the percent you retain... depends on the size of the deal and how high of an ROI or IRR you can project. If you take a high equity stake and it brings down the ROI and IRR so low that you can't find investors or your investors balk at the returns... then you need to lower your equity stake to bring the ROI and IRR up. Also you didn't mention it in your question but you can also put in a finders fee or acquisition fee of 1-2%.
@Arun Iyengar we usually charge 1%-2% asset management and the equity split is really project specific. It might be anywhere from 10% to 35%. If there is a lot of hard work to be put (major rehab) we might negotiate more equity or structure the deal differently.
We see 70/30 (GP/LP) splits pretty common with experienced syndicates. On the GP side, they can range from 20% to 50% depending on returns targeted for the investor and experience level of the sponsor. The splits will typically start after the 8% preferred return is paid out to LPs. This favors LPs. Some syndicates will do a catch up after 8% where they receive 100% after that until some point where the project is back to a full 70/30 split. Waterfalls are also common after a targeted return to investors hits say 18%, then the split may change to say 50/50 for every $1 distributed above that 18% IRR. This does not cap the investors return but further rewards the GP for exceeding expectations.
For property mgt fees, typically see 3% and asset mgt fees of 2% for the experienced syndicate. The asset mgt fee is to support the efforts of the syndicate to hold the property manager accountable to execute the business plan and optimize the value for the investors. The asset management fee is usually based on the monthly revenue. A good syndicate will have a lot of flexibility on when to pay itself this 2%. Ex. take the 2% only after the 8% preferred has been paid out or defer it during a weak market.
Thanks for all of your feedback.
@Jeff Greenberg do you put any money down on your deals?
@Salvatore Lentini I agree with you that if the deal is not attractive to investors, there is no point talking about my % of the cut! Good point about the finder's fee.
@Joseph Gozlan Makes sense that the more effort you put in, the higher you would want your equity percentage to be
@Scott Krone 20% IRR is really good and a dream for the investments in the pricey bay area market. I presume that if your deal is well above 20% IRR you take a larger equity stake?
@David Thompson Thanks for the detailed response. Agree with the risk reward approach you indicate for exceeding expectations. Also agree that the syndicate should have flexibility in thinking about its investors first.
@Arun Iyengar sort of a silly answer but "why cares what they make". The deal is what makes the profit margin better for the lead. Of course it needs to be underwritten conservatively (rental comps, escalations, business plan). In the end if the deal is conservatively underwritten and therefore comparing apples to apples you need to look at the total return anticipated or IRR for the LP.
I agree with what has been written on splits. You are able to make it what ever you want as long as the deal works for the investors. The higher the preferred return the less you could offer typically on the split or have an earlier waterfall as well. The key is figure out what works for you typical deal, talk with your securities attorney to get a detailed plan and stick to the program and make any changes to splits on future deals slowly and with a good explanation to the investors
@Lane Kawaoka good question, but it is important to ensure that any deal with an investor is not a one and done.
@Todd Dexheimer thanks. I haven't set a target yet for preferred return given the low cash flows from deals in the pricey silicon valley. I am approaching this as more of an equity gain with some dividends given for investing the cash.
This is a great discussion thread for syndication.
I have a project that I would like to seek some performance incentive for my company's management effort. Is this best tied to NOI? Rent increases in time? Performance...? What do equity participants like to see?
I want to get paid when I make the project generate more money for them. I want them to be happy to provide the incentive knowing that I will be motivated.
I am asking specifically about a portfolio of newly built SFR to be held as rentals.
@Clifton Kaderli The metric most investors look for will be the project IRR. The second interesting metric to them will be their Cash on Cash return, and the growth of that during the period of ownership.
I am sure other experienced syndicators will have a lot more metrics to add to the above two, but those are the main two that I focus on with my investors.
@Arun Iyengar In the beginning we did not put funds in as we needed to stay liquid. My team has been putting in around 10-20% of the equity. This is not required, but to some investors, it is very important.
@Jeff Greenberg that is my idea as well. I have a number of other multifamily investments on my own and so feel I am fully invested in real estate for now. Good to know that it worked for you without bringing in your own funds.
@Arun Iyengar You still need the funds for the Em and inspections, but that can be borrowed from your EP's
@Jeff Greenberg Yes, I understand and I can always front that.
@Arun Iyengar 1-5% finders fee, 1.5-2% AUM fee, 30/70 equity split after preferred return, 1% of sale
@Diogo Marques thanks for the numbers. With a 30% equity split, why is there a charge of 1% on sale? Is that because you are also a broker?
Syndicates can be done many different ways. Also of importance is DEAL SIZE. If you are syndicating a 2 million dollar deal and get it to value say in 3 years of 4,000,000 to be simple say 2,000,000 in upside then you have 50% to yourself or 1,000,000 before taxes to be paid and other kicker fees added in to boost sponsor return.
If passive investors push back on tiny deals for too much equity then I walk. If deal was 50,000,000 and after 3 years property is worth 70 million and you get 30% of 20 million upside that is 6,000,000 or 2,000,000 a year.
Different Universe so size does matter for overall returns. I know one developer for retail that takes 50% back end promote regardless of deal size. He does multiple ones and one project is 200 million plus but he has been doing it over 30 years so can demand his terms.
@Arun Iyengar I am not a broker. The 1% of the sale is standard when you sell the property. You have all the work. As an entrepreneur you gather people, analyze the deal on exit, and have to pay the brokers and the sale expenses. That takes a chunk of your time. It is standard.
@Joel Owens Agreed with the size of the deal impacting the % of equity to take. The one I am thinking about will be just under $10M, and so will be on the smaller size. All of this info has been really good and helps solidify my charges and equity.
@Diogo Marques your reasoning makes sense. Thanks for explaining your thoughts.
@Arun Iyengar exactly look people up on the interwebs. If they don't have a following its a big red flag. I have been contacted by a scam guy who talked a good game.