Specialist · Miami, FL · Member since 2017 · 151 posts · 20 votes
When structuring a syndication deal geared towards apartment building acquisitions with a value-add strategy, how do General Partners make their money? More specifically, how does the smallest General Partner (1.5%-2.5% equity) makes their money? Is it a 1.5%-2.5% of the entire disposition amount? Or just the capitalization through renovations, etc. So that small 1.5%-2.5% General Partner would only make money at disposition and the percentage is based on?
Equity investors are always #1 & they get paid their returns 1st.
When we syndicate deals, if the Deal allows for it, we can possibly earn income in the following 1-5 ways:
Acquisition Fee: paid at closing
Asset Management Fee: paid quarterly over the life of the investment
Capital Transaction Fee: paid at refinance - if there’s a refinance
20-30% Of Cash Flow: paid quarterly over the life of the investment
20-30% Of The Profit: paid at refinancing &/or disposition of the investment
The way these are split is determined & agreed on by the General Partners. All are disclosed to Equity investors aka Limited Partners. Again, the Equity investors are always #1 & they get paid their returns 1st. We work in things like an asset management fee, for example, if the Deal is really "Juicy" and allows for it while maintaining an attractive ROI for the Equity Partners.
I am assuming that it you could work out all these details in the agreement beforehand (i.e. "small general partner" is entitled to 2% of the equity value of the investment property..."
@Arturo Borges The details on how the GPs collect fees/profit splits is spelt out in the operating agreement and PPM. There is no standardized approach.
Is the 1.5-2.5% fee you are referring to the acquisition/due diligence fee? If so, that is a one fee among many fees that the GP can claim.
Equity investors are always #1 & they get paid their returns 1st.
When we syndicate deals, if the Deal allows for it, we can possibly earn income in the following 1-5 ways:
Acquisition Fee: paid at closing
Asset Management Fee: paid quarterly over the life of the investment
Capital Transaction Fee: paid at refinance - if there’s a refinance
20-30% Of Cash Flow: paid quarterly over the life of the investment
20-30% Of The Profit: paid at refinancing &/or disposition of the investment
The way these are split is determined & agreed on by the General Partners. All are disclosed to Equity investors aka Limited Partners. Again, the Equity investors are always #1 & they get paid their returns 1st. We work in things like an asset management fee, for example, if the Deal is really "Juicy" and allows for it while maintaining an attractive ROI for the Equity Partners.
from what I've seen in the LIHTC industry, GPs are paid a developer fee, which is usually in the few millions of dollars (projects are $10M +) but paid out in stages and after certain benchmarks (DSC, perm financing in place, etc) are met. So their pay isn't necessarily tied to their ownership %.
Fund syndicators are usually in the 1-4% range of invested funds, then have an annual AM fee and a disposition fee of around 1%.
The question on payout is related to how much money you put in and the effort you put in. If you are the lowest equity GP but the one that spends the most time, you can ask for a share of the return that is higher than the equity you put in. I would structure that as an expense paid out as a salary or equivalent.
As has been said here, you first pay the investor before you can pay yourself.
@Omar Khan What I'm specifically talking about is being a low equity GP. Maybe I can raise a certain amount of money for a deal to a bigger or others, bigger GP, and for that I get a 1.5%-2.5% equity in the deal. I know that is . something that's negotiable and there's no a standard, but how would that be structured? based on what? And is that 1.5%-2.5% equity based on the entire disposition amount? or the equity created during the investment cycle? @Account Closed
@Arturo Borges if you have 1.5-2.5% of the GP, then likely you will get 1.5%-2.5% of the GP acquisition fee, asset management fee and equity fee. You have ownership, therefore get paid how the owner's get paid, just to a lesser extent. As @Omar Khan said, though, there is no standard, so it's really what the ownership agrees to.
@Arturo Borges
lots of good points made in this discussion. Again these can be set up however the GPs in the group want to set it up. One idea if you don't have money to put in, is to put in your aquisition fee you earn as your equity. You will find investors want their GPs to have skim in the game also.
@Omar Khan What I'm specifically talking about is being a low equity GP. Maybe I can raise a certain amount of money for a deal to a bigger or others, bigger GP, and for that I get a 1.5%-2.5% equity in the deal. I know that is . something that's negotiable and there's no a standard, but how would that be structured? based on what? And is that 1.5%-2.5% equity based on the entire disposition amount? or the equity created during the investment cycle? @Account Closed @Arun Iyengar
I think I Understand.
It should be spelled out, clearly, in the operating agreement.
It would/should be structured as equity based on 1.5-2.5% of the cash flow & 1.5-2.5% Of the entire disposition profit.