How do syndicators make real money?

Question

How can a syndicator make real money on a 70/30 split? I’m doing the math and it seems to a lot of risk for not that much reward. I understand there are Acquistions fees, but if all the LP’s get their money before the GP say at a 6% preferred return, I’d the property produces a 8 % return, there doesn’t seem to be much for the GP.
I’m a newbie to syndication but not a newbie to investing.

Can someone please let me know their thoughts?
I really appreciate it!!!

Sincerely Robert

Can someone please let me know their thoughts?I really appreciate it!!!

Sincerely Robert

Robert Squires · Answer

Chris I really appreciate you taking the time to respond to me. Have you ever done deals that are a 50-50 split after a hurdle? Have you ever done deals with a buyout option for the LPs? A 200% return or such? I’ve heard of these things and trying to understand the market.

thanks again

Robert Squires · Answer

Thank you so much! Is there a way to properly and effectively syndicate without a sale at the end? I would prefer a refi but the dollars may not cover enough to pay back the LP’s. Thoughts?

Chris Levarek · Answer

@Robert Squires Depending on the deal, it most assuredly can be a very poor deal for the syndicator. I've seen splits even range up to 95/5 in favor of the LP. The most important point to building a syndication deal or investing in a syndication deal, is having one that makes sense for both parties.

Not making it worthwhile for the management team can lead to a poorly managed property or mismanaged business plan. Not making it worthwhile for the investor, can lead to no repeat investors and end of the road for the syndication group!

Yes you can do a very large BRRRR with syndications as well. Imagine a refi in year 3 that due to increased value of the property through renovations and rent increases, pays out projected investor returns and down payment. This is entirely possible. Of course all partners need to be aware and comfortable with this outcome.

Patti Robertson · Answer

Personally I would never invest in one.  Back in 2005, before they called them syndications, my husband and I invested in some LLCs where we were preferred investors.  We were given an 8% return.  The operating partners started misspending the money on things they shouldn't, made mistakes, overpaid for properties, etc.  Next thing we knew the SEC was shutting them down as a PONZI.  I really believe it started out legit, but they thought they could dig themselves out and did some criminal things to raise money to keep paying the return to avoid suspension of trouble from the investors.  A total of $220M has been invested, $100M was defined as "diverted" at the time of the SEC shut down. The investor community only got back 10% of our investment and that took 11 years to completely get out of receivership.  I'd rather invest in smaller projects that I can afford to be in full control of.

https://archives.fbi.gov/archi...

Charles Carillo · Answer

@Robert Squires

Most (multifamily) syndicators aim for a minimum 15% IRR. The acquisition fee and the asset management fee are really designed to cover expenses for the GPs during the value-add process. GPs really make money when a property is sold and all equity that has been created is now distributed to LPs and GPs. One other point is GPs are (should be) heavily invested into the syndication (alignment of interest) thus making them LPs as well (typically in our syndications the GP invests 20%-25% of the raise). This also provides the GPs with regular distributions; similar to every other LP.

Chris Levarek · Answer

@Robert Squires

We've done some joint-venture syndications at a 50-50 split. Here's the thing, anything is possible. It really is about alignment of interest. If the partners you are working with are not satisfied or aligned, then perhaps you are simply working with the wrong partners. There are always people who find different arrangements appealing. If you try to appeal to all, you will ultimately fail.

There are some groups who do buyouts and as long as this disclosed early with investors, there is no misrepresentation and all is well. Many are perfectly fine taking their capital and redeploying elsewhere early. In fact many like this, yet some do not. So you just have to align with partners interested in the deal structure. Disclose all and hide nothing. This is the way.

With the vast appreciation in property values, returns could very well be 100%, 200%. However, it's about delivering a expected result. Deliver a home run and investors will expect one every time. So set the ground stage early, and be honest up front.

Paul Moore · Answer

@Robert Squires. Great question, and one I asked myself years ago. One thing to keep in mind is that the preferred return hurdle is only in force as long as there is unreturned capital. So if you can refinance, as a syndicator, and pay all the equity back to LP investors, You effectively have 20 or 30% of the deal now. And it’s a great deal for investors because you’ve taken their risk off the table and giving them funds to invest elsewhere.

Another model is to actually re-capitalize and by the investors out at that time. A few syndicators I’ve heard of actually buy their investors out add a predetermined level with refinance proceeds or new capital at a lower price.  I’ve heard Ken McElroy has done this.

Happy Investing!

Paul Moore · Answer

@Patti Robertson I’m truly sorry for your experience.  I will say this is not my experience nor that of thousands of other investors. Though it happens in any business arena, even among public firms as we’ve all seen in the news.  This points to the extreme importance of due diligence, though bad things could always happen as they did in your case.

I would point everyone who wants to invest in a syndication to get the wonderful BP book by @Brian Burke: The Hands-Off Investor.  It will help you do proper due diligence on syndicators and deals.

Robert Squires · Answer

Thank you! This has been very beneficial. If we don’t sell at the end, what kind of cash on cash return is market? I’m looking at something that’s a 10% yearly return to investors. And it feels really tight :/

Michael Bishop · Answer

@Robert Squires 50/50 isn’t unheard of after a hurdle, typically IRR in the 13-17% range depending on a variety of factors. You might even see 50/50 after a second hurdle, say a higher IRR or an equity multiple.

As others have said, Sponsors typically make their purse at an equity event (refinance, sale, occasionally supplemental loan) and the acquisition/PM/etc fees are “keep the lights on” fees.

How do syndicators make real money?

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