Apartment Syndication Fees

21 Replies

Hi Everyone,

I have a few residential rentals both in my area (Boston) and Cleveland, OH and wanted to expand a little into a commercial deal in my local market (6-10 units, purchase price $2.5-4.0M).


I'd syndicate 70% of the deal to friends, family, and colleagues but wanted to know if my fees are reasonable for a first time syndication.

I'm thinking 3% acquisition fee, 80/20 equity split above a 8% preferred return and somewhere between a 1-2% annual management fee. No other fees. How does that sound?

You said commercial, but called out "units" so I have my MF hat on; apologies if I missed the point and am completely off target.  

You say you are getting a deal at $400K/door (using your $4M and 10 units).   That sounds like serious 'A' class; there is usually some upside return limitations in A class.

In my world, you would raise $1M and get an agency loan for the $3M (but we are doing B & C class, $60K to $100K/door - no idea what loan you can get on the higher $/door).  The $1M raise is barely enough to make the attorney fee worthwhile.  If the raise is higher and there is little or no leverage, the returns are likely lower.

In my world, the Deal Sponsor hire professional management - a huge positive in my opinion.  The Deal Sponsor takes on Asset Mgt; so there are two folks, a check and balance.  Not sure how you get the 10 units managed at a reasonable cost unless you are doing it yourself for near nothing.

Next, I don't quite get how you syndicate 70% of a deal.  That just sounds like you are keeping more of it as sponsor.  Perhaps this is common, but I have not run across such a hybrid.  And as the attorney fees are about the same (7 units vs 10 units), seems like you are adding a bit more burden to the investors.

As Colton indicated, there are a lot of details left out here.  So it may be just fine.  The fees are higher that many MFs I have done, but the real question is the returns.

Regards,

Charles LeMaire

A little clarifications — should have been a little more clear and specific.

My partner and I, the GP are putting into 30% and we’re raising 70% from friends and family.

The properties we've been looking at are B Class, and we're looking at 4-5% cash on cash returns and 11% IRR, and we're planning on holding the property for 4-6 years.


I hope that clears up some of the questions.

Originally posted by @Eric D. :

A little clarifications — should have been a little more clear and specific.

My partner and I, the GP are putting into 30% and we’re raising 70% from friends and family.

The properties we've been looking at are B Class, and we're looking at 4-5% cash on cash returns and 11% IRR, and we're planning on holding the property for 4-6 years.


I hope that clears up some of the questions.

How do you plan on paying out an 8% pref with 4-5% cash on cash? Also 11% IRR is really low.

Originally posted by @Todd Dexheimer :

How do you plan on paying out an 8% pref with 4-5% cash on cash? Also 11% IRR is really low.

Todd, how would you recommend I structure the preferred return given a 4-5% cash on cash? 

Also, 11% is the worst case scenario, the average case would be about 15% IRR.

Thanks!

 

@Eric D. pretty straight forward structure and within line of market especially for that size deal. However, you didn't clarify 3% of what and 1-2% of what. I'm assuming 3% of purchase price and 1-2% of gross income per month, which would be in line with market. Often times we'll do a second hurdle with a better split, so if we do much better we get a bit more of the pie. Often times we'll do 60-40 over 14-15% and underwrite to at least 15% IRR net to investors after all splits/fees.

I'm with @Todd Dexheimer on this one. I wouldn't invest in this project if you were promising a 8% pref and kicking off 5% CoC return. That alone would have you behind and eventually you wouldn't care about the project because it's not kicking off any capital for you and your partner. Once you're playing catch-up with the pref, that dilutes any of the GP returns.

Also, to go against @Tj Hines (sorry TJ) I would not include the disposition fee. You don't want to fee your investors to death. Just my personal preference. To provide some clarity, I haven't included a disposition fee in our opportunities thus far and don't plan to at this time. 

I would advise you to learn more about the business model. Syndication is a different animal when your operating at that level. 

@John Fortes

Thanks for your advice John, if I am targeting a 5% CoC return, what would you recommend I set the the preferred return? Or should I not set one for this deal?

Also are there any good sources you recommend to learn more about smaller scale syndications? Most I've found online or in podcasts focus more on the 50+ unit deals.

@Colton Fairchild Thanks for that suggestion, read that and Multi-Family Millions by David Lindahl and spoke to a couple of friends who do larger scale syndications. All focus on 50+ units buildings though, I'm trying to find something that focuses primarily on smaller buildings.

@Eric D. The high per unit cost of this project is causing you to have a low CoC return. If your pref return is 8% and your CoC return is 4-5%, how do you plan on ever making any money as the GP?

I’d recommend evaluating more deals. This project seems like it’s not good for the LPs or GP (at least at this purchase price).

@Eric D. great question, start with @Joe Fairless & @Theo Hicks syndication book. 

You can learn the business model in various ways by investing passively in a deal and this will quickly help your learning curve because you are "paying attention to your invested capital" aka getting paid passively to learn. 

Get a mentor which might be beneficial to you at this early stage. This would help you understand the model and learn it quickly as well.

IF you were to syndicate a smaller deal, work with @Amy Wan of Bootstrap Legal as she really makes it economically efficient. You would have to discuss with her to see what size (price range wise) would fit that type of deal. 

Keep listening to those podcast that talk about the size range you mentioned. It's the same concept. Besides, you'll find it difficult looking for podcasts that fit that 6-12 unit range to syndicate. 

Happy investing!

@Eric D. A ton of great feedback already. I want to give you a general guidance. Typically when you're starting out in syndication (or any other businesses for that matter), and have no to limited experience in the field, you want to be able to attract investors by offering the terms that are more favorable to them than everyone in the industry offers. Then gradually you adjust the terms to be fairly compensated for the work you do. Slow but steady is the key! I hope this helps!

My best!

@John Fortes you have the right to make that call as you're leading your own syndications. We charge a modest 3% acq fee. I've seen acq fees as high as 5-6%. We charge 2% asset management fee as well as the 1% disposition fee you're not in favor which is cool to me. You're entitled to your own opinion. By all means for running the asset for the next 5-7, 10 yrs you don't think you're worth the 1% disposition fee to arrange the sell, which is a ton of work, by all means if you don't feel thats worth 1% the continue as you do and don't charge a disposition fee. I'm coo with that if you are. I'm not saying that's right or wrong on your end. That's your choice. Let me tell what else I've seen tho ...


I've seen sponsors charging 5-6 different fees (acq fee, asset management fee, refi fee, source the debt fee and dispo fees) Yeah seriously...lol! According to that we feel our model is right in line. How one person runs their company and operations doesn't dictate that other business owners should do the same. It's free enterprise my friend. In total our fees as sponsors is 6%. Happy Investing my friend.

My man @Tj Hines I totally agree. My intention of this convo was not to impose the fee them to death structure as you laid out the 5 fee's being charged. Completely understand. Love what you are doing and building. Love having these discussions and just because we are not currently including a dispo fee does not mean it will not ever be included in future opportunities. As of now, we don't. 

Thank you for the counter argument and keeping with the conversation brother. Iron sharpens iron. 

@Eric D. - I'll give you a few things to consider for your first syndication.

Much of this will depend on who you're approaching.  A sophisticated investor (HNW) who's invested in syndications before will expect certain upfront fees (1-3% is fine- I look at the deal size, the risk and amount of time it takes to find the property.  Then, I apply a round # to it.  So for a 2.5M deal, you could reasonably charge $50-100k)

If you're putting up 30% of the equity that is a big vote of confidence on your part.  Your investors will like that.

You're split of 80/20 in my opinion is a bit too rich for the investor.  I've done this in the past- where on my 1st deal, I gave way too much up.  It makes for raising capital much easier- but, when the deal succeeds and you realize how much work went into it (finding it, financing it, fixing it, etc) - you may look back and say, wow, that was a really good deal for the investors.

8% pref is fine.  will the deal cash flow on day 1 to pay that?  

Management fee of 1-2% of gross rents is also fine

You may want to consider (only if you feel it's right) - a disposition fee and/or mortgage placement fee.  These are not required and frankly, I don't do them on every deal, but they are common.  

It sounds like you're coming at it with the right mindset- you and your investors are in alignment

With experience and a track record, you'll likely find a split with your investors that is more equitable.  If this is your first syndication- I think what you have is fair.

If you'd like, I wrote a short book on exactly this topic (Club Syndication).  Happy to link or send you a pdf copy (not sure of the rules in this forum).  Not pitching anything, just shares my exp raising money for past 10 years.

Originally posted by @Tj Hines :

@John Fortes great podcast to my friend. A left you a 5 star review

That means the world to me my brother! Truly appreciate you. Thank you!

 

Originally posted by @Eric D. :

Hi Everyone,

I have a few residential rentals both in my area (Boston) and Cleveland, OH and wanted to expand a little into a commercial deal in my local market (6-10 units, purchase price $2.5-4.0M).

I'd syndicate 70% of the deal to friends, family, and colleagues but wanted to know if my fees are reasonable for a first time syndication.

I'm thinking 3% acquisition fee, 80/20 equity split above a 8% preferred return and somewhere between a 1-2% annual management fee. No other fees. How does that sound?

 Personally I think all these fee are an overkill. We are charging an asset management fee(25) and part ownership and that is it.  All these fees are overkill, hurt the deal, and by focusing on earning from the property performance aligns all interests. 

Updated almost 2 years ago

typo 2% asset management