Structure of a syndication deal. I'm promote + land

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Structure of a syndication deal. I'm promote + land

Tommy C.
Rental Property Investor · Detroit, MI · Member since 2021 · 20 posts · 6 votes

Hey BP,

I’d like some feedback on how to structure a syndication deal on an 8 unit MF for rent apartment with myself and 3 outside investors / friends. I've never syndicated a deal and only have some basic knowledge of the process. I've never been on the preferred end or the promote end of any deal, so I’m curious how to structure it in an appealing way. 

    Ideally this deal would be put together for the 20% equity required to finance the new build. I have multiple parcels in mind that are appropriately zoned for this type of structure. 

    At a high level, I believe this is a an 11.5% cap and 10% IRR immediate cash.

    Here are some more details: 

    • - Yearly NOI = $120k
    • - Deal ends after 5 years
    • - $120k x 5 years = $600k
    • - $600k - $400k = $200k total gain => (5 year gain - initial investment = total gain)
    • - $200k gain / 4 people = $50k per person
    • - $50k gain per person / 5 years = $10k per year (or 10% IRR)
    • - Quarterly immediate cash payouts from rents will be paid back to investors upon receipt.

    Would this deal make sense? Does anyone have any resources on what a typical agreement looks like? 

    I want to get a sense of what a favorable offering would look like for 3 outside investors. The benefit for me is that I would own the building outright after year 5. 

    Any tips would be appreciated,

    TC

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    • Chris SeveneyBusiness Member
      Moderator
      Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
      3y

      @Tommy C.

      If the investors have no upside then it doesn’t make sense for them and they are better off as debt partners

      After five years you should either sell the building or refinance and give them profits

      A deal like this would give the investors 60-80% of the profits as well on the back end.

      The sponsor who has limited money gets fees during the years but gets a portion of the payday, not all of it

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    • Tommy C.
      OP
      Rental Property Investor · Detroit, MI · Member since 2021 · 20 posts · 6 votes
      3y

      Thanks for the input Chris.

      I agree that the refinance on the backend is crucial...

      I put some more thought into this and adjusted the structure that aligns better with this principle:

      Equity Split:

      • Me (the sponsor): 10%
      • Three investors (combined): 90%

      Preferred Return:

      • Investors: Offer them a preferred return of 8-10% annually. They receive this return before profits are distributed.

      Profit Sharing:

      • After the preferred return is met, profits could be split as follows:
        • Investors: 80%
        • Me: 20%

      Exit Strategy:

      • After 5 years, I could either sell the building or refinance. At that point, distribute profits as follows:
        • Investors: 80%
        • Me: 20%

      Fees:

      • During the holding period, as the sponsor, I could receive management fees or acquisition fees.

      This structure allows investors to benefit from the upside potential, both during the holding period and upon exit. The profit-sharing split on the back end ensures that they are rewarded for their investment and participation.

      Like you mentioned Chris, giving your investors a significant portion of the profits on the back end is important to align incentives and make the deal more appealing to them.


      Thanks!

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