Analyzing Syndications and Paying Investors

3 Replies

Hi all,

I have two questions regarding the financing associated with syndications. First, I'm breaking down the costs into 3 broad categories: the purchase price, the closing costs, and the rehab costs (if any). For simplicity, let's assume I convince investors to pay for 100% of those costs. Now, when paying them their preferred interest rate - let's say 8% - should I be paying them that 8% based on the total money they invested? Or just 8% of the purchase price + rehab, or just purchase price? What is acceptable in these situations?

Second, if I'm charging an acquisition fee, is it normal for them to pay that upfront? Or should I take that out from the NOI for the first 12months?

Any insight is much appreciated! Thank you all!

You can also look into financing the rehab costs. That'll require you to bring less investor capital to the table. 

When we talk in terms of returns to investors, it's always based on their capital invested into the deal. So if we say an 8% return, the numerator of that calculation is the dollars they get in return, and the denominator is the capital they put up.

Acquisition fees are usually paid out up front. In addition to compensating you for closing the deal, the acquisition fee also repays you for the various upfront costs you had to foot. Such as legal fees, travel costs, closing costs, etc.

Thank you Taylor. This sparked a follow up - if I were purchasing a lot for $1MIL and then constructing a new building for $2MIL, and investors financed 100% - should my acquisition fee be based on the $1MIL purchase price or the $3MIL total value of the property?

Thanks again for the help. 

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Originally posted by @Tyler Fischer:

Thank you Taylor. This sparked a follow up - if I were purchasing a lot for $1MIL and then constructing a new building for $2MIL, and investors financed 100% - should my acquisition fee be based on the $1MIL purchase price or the $3MIL total value of the property?

Thanks again for the help. 

Always focus on what the investors have put in. They are looking for a return in their money. 

The exit value is an important variable in the calculations. Still, it is the return the investors will earn on what they contributed.