Upside of Syndication Deals?

15 Replies

Hello BP Community,

I just wanted to gather some opinions on apartment buildings and syndications deals. What exactly is the upside on this deals as a GP? When do you as a General Partner make money? Do you actually make a monthly income out of these deals? Or is the real upside when you sell the property and distributions are made?

Looking forward to hearing from you guys!

Hi Arturo,

As a GP you can possibly earn a commission on the sale by representing the group. 

You can also charge a management fee ON TOP of the property management fee that is paid to managers. 

And you decide how ownership is broken up. if you bring the loan (65%) and the partners bring the cash of 35% then you can try to split ownership in that manner.

So you made money on buying it (commission), money monthly for managing, and money on the sale (commission), and as an owner.

That is just one way to try to structure it. I am currently trying to do a similar deal but on a 2-4 unit property. and my investors are family members and friends. 

Hi @Arturo Borges , great question! The GP gets paid through a few different avenues: 

1. Acquisition fee (1-3%), paid upon closing

2. Asset management fee (1-2%), paid throughout the life of the investment

3. A cut of the cash on cash returns (often a 70/30 split, with 30% going to the GP), paid throughout the life of the investment

4. A disposition/capital transaction fee (1-3%), paid upon sale of the asset

5. A cut of the profits from the sale of the asset (often a 70/30 split), paid upon sale of the asset

All of these numbers can be tweaked based on the deal structure. I've seen the split as low as 90/10 and as high as 50/50. Many syndications offer a preferred return, so the first 8 or so % of cash on cash returns go 100% to investors, then GPs only get paid if there are returns above and beyond that (further incentivizing the GP to operate well). 

In my experience, investors typically want to know that the GP is getting adequately compensated. Of course, they don't want to get pelted by fees, but a reasonable amount to the GP assures the investor that the GP is incentivized to take care of the investment.

Thanks a lot Annie! @Annie Dickerson

So basically you'd get a 1-5% when purchasing the property upfront, and after 4-5 years, depending on the strategy, another 1-3%, plus the 30% if it's any equity left right?

On a large scale syndication deal, the deal sponsor(s) (=syndicators) typically get 10-30% of equity (but that varies) + 1-3% acquisition fees + there might be other fees. You get monthly income on your % along the way (depends on the structure...LPs could be getting preferred return) + a payout when the property is sold (if it's sold at a higher price than you bought it, obviously...)

Originally posted by @Arturo Borges :

Thanks a lot Annie! @Annie Dickerson

So basically you'd get a 1-5% when purchasing the property upfront, and after 4-5 years, depending on the strategy, another 1-3%, plus the 30% if it's any equity left right?

Yes, you'd get a fee up front. This pays for all the work you've done to acquire the property - travel to the site, due diligence, running the numbers, etc.

During the life of the investment, you would also be getting paid (monthly or quarterly, depending on how you set it up). You'd get paid the asset management fee and potentially through cash on cash returns as well. The asset management fee ensures you're paid for the work of managing the asset from acquisition in year 1 through sale in year 5 (because, hey, that's a lot of work!). :)

And then, yes, once you're ready to sell, you'd get the disposition fee and % of the profits at the sale.

Great Annie, one last question and sorry to bother you!

That upfront acquisition and asset management fee (the two upfront fees), are based on the limited partner's capital, or on the entire purchase price of the deal? For example a 10MM deal, it would be a 1% acquisition fee, and 2% asset management fee, for a total of $300K upfront fee? And who pays that? meaning, do you add that up when underwriting the deal? as if the total acquisition cost instead of 10MM is 10.3MM?

Acquisition fee is based on purchase price. AM fee is paid on monthly gross collections. Sponsor proforma should include all fees.

@Arturo Borges - an example of a deal

Purchase price: $10,000,000

Limited partner equity: $3,000,000

Yearly income: $1,800,000

Cash flow/year: $400,000

Profit at sale: $500,000

You then get a 2% acquisition fee of $200,000 at time of closing (you need to raise this from the equity partners)

You then pay your investors an 8% preferred on the equity each year = $240,000

Now you take your 2% asset management fee on the revenue = $36,000

Then you split the remaining profit 70/30 = ($400,000 - $240,000+$36,000)*.3 = $37,200

Then you split the end profit at sale 70/30  - $500,000*.3 = 150,000

So in total you made $73,200/year and $200,000 on the front end and $150,000 at the back end. 

I rarely see acquisition fees over 3% and usually don't see disposition fees. The key is to not get too greedy. You need to be sure to take care of your investors first!

@Arturo Borges - the investors pay for those fees and are incuded in the underwriting, yes.

@Todd Dexheimer excellent post.

@Oscar Pinto bringing the loan is not worth 65% ownership of the deal.

@Annie Dickerson @Julia Bykhovskaia I have (unfortunately) seen splits all the way up to 80% going to the sponsor (sometimes presented in the form of shares rather than transparent ownership splits).

Arturo, multifamily syndication gets a lot of attention on BP but lots of asset classes are syndicated (industrial, mobile home parks, self-storage, retail, government buildings, assisted living).  I recently reviewed an offering memorandum for Dorper Sheep.

@Mike Dymski you're buying Dorper Sheep now? I heard that market was in a bubble, with really low cap rates

Originally posted by @Mike Dymski :

@Todd Dexheimer excellent post.

@Oscar Pinto bringing the loan is not worth 65% ownership of the deal.

@Annie Dickerson @Julia Bykhovskaia I have (unfortunately) seen splits all the way up to 80% going to the sponsor (sometimes presented in the form of shares rather than transparent ownership splits).

Arturo, multifamily syndication gets a lot of attention on BP but lots of asset classes are syndicated (industrial, mobile home parks, self-storage, retail, government buildings, assisted living).  I recently reviewed an offering memorandum for Dorper Sheep.

Wow, 80% to the sponsor, no wonder people have mixed feelings about investing in syndications. I will definitely keep my eye out for those, yikes!

@Ryan Cox @Todd Dexheimer  sheep are probably good tenants...and it may not be a baaaaaaad investment.  Sorry, couldn't resist.

@Annie Dickerson it's common in development deals where the sponsor is doing a lot of heavy lifting but it also makes it's way into non-development deals with less sophisticated passive investors.  One bad apple does not spoil the whole barrel though...the sponsors on BP are a highly transparent group.

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