CoC and equity shares in MF syndication

10 Replies

I have an opportunity to invest in my first MF as a passive investor. The sponsors are putting 10% down for a 25% equity share. That means that the other 90% down only gets a 75% equity stake in the deal... basically your dollar has less equity power than the sponsors. Here's where I get lost: the COC return as a percentage would no longer be the same for the sponsor and investor, right? For the sponsors, it took less money to earn the equity share, thus a higher COC.... and the opposite is true for the investor. The offering I was given shows the projected COC return for investors, but not sure if it's been corrected for this.

Hoping I framed my question well enough and someone can clarify.  Thanks, BP! 

Your observations are corrrct but are merely reflective of how a syndication deal is set up. The sponsor commands an equity stake, say 20-30% for putting the deal together and running the process. That’s how it’s set up. Their “invested $” is actually a positive sign for you in that they are putting some skin in the game. 

@Kurt Jones is spot on. The syndicators, or General Partners, have uncovered the opportunity, and will be pro-actively managing it. For many syndicators, this is their active income stream, so they and their team technically trade their time and a portion of capital, for their return. The efforts of real estate syndicators are to find and provide opportunity to investors, also referred to as Limited Partners, that can achieve returns in line with their own portfolio investment goals, but through a tangible asset that many would consider safer, and certainly less volatile, than the stock market. 

@James Rader , please ask you deal sponsor if the effect of his/her premium is factored into the stated C.O.C.  If it's not ask to see the actual investor return not just the return for the project as a whole.

If they can't sufficiently explain it or worse, refuse to, you must run away quickly in my opinion.

@James Rader You already received the answer to your CoC return via syndication question. I just wanted to point out that in addition to this value, you should evaluate a number of other deal components, such as the length of the investment, exit strategy, average annual return, type of a deal - value add or something else; review the sponsors themselves, verify their references if this is your first interaction with them.

If you'd like to discuss it further please feel free to reach out directly.

Thanks for the replies, everyone. I've been speaking with the deal sponsor and understand their strategy and fees. I also fully understand why they claim a bigger piece of the pie- they're the ones doing all the work. I was just struggling to wrap my mind around the COC returns and how they apply.

@James Rader I think you are making more complicated than it needs to be. Don’t worry what the GP makes. It’s their JOB to run this thing and they are essentially getting paid.

You need to focus what you are getting as the LP and what are the assumptions used to get that numbers. Here is an example. Use a 7.5 cap instead of a 7.75 now your LP return over 5 years goes from 80% to 100% magic. And lol you were all focusing on the wrong thing.

Originally posted by @Lane Kawaoka :

James Rader I think you are making more complicated than it needs to be. Don’t worry what the GP makes. It’s their JOB to run this thing and they are essentially getting paid.

You need to focus what you are getting as the LP and what are the assumptions used to get that numbers.

LPs need to understand the whole story.  This is important for both (1) transparency/trust and (2) to understand the financial condition of the sponsor and their properties.

I don’t think I’m making it more complicated than it needs to be.  I’m leaving no stone unturned and making sure I fully understand every aspect of the deal so there aren’t surprises later.  

For anyone still following, the GP’s accountant had already accounted for it.  I just reviewed the offering again.  The net levered cash flow was reduced by 25% prior to the investors metrics being calculated.  It’s all correct... I’m satisfied now!

@James Rader Hey James, there are other fees syndicators charge in the front end, during the asset management period, and upon exit of a deal. These fees should be taken in account when you are trying to compare how much the GP is making. 

As for your question, first, you need to make sure that the CoCR you are looking at is for your invested capital and not a generic 100k example. Second, make sure that the return is for the life of the deal and not just annually.  

In these instances, the best thing to do is simply ask the syndicator, and if he/she isn't ready to show you the full picture then there is a transparency issue right there. 

Hope this helps, James. Goodluck. Thanks! - Ola

@James Rader from your additional comments on the thread it seems like the Sponsor was responsive and followed through until you were completely comfortable with your knowledge on the deal structure and in an investment with them. To me the Sponsor willingness to explain anything and everything about their deal until the investor doesn't have any more questions is key, so that's a huge plus!

I'm sure you understand that, as others have pointed out, (1) the Sponsor's equity is a result of their efforts rather than their equity invested and (2) any additional Sponsor equity invested as an LP should be viewed as a good thing as it shows alignment.

Some more food for thought:

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