Syndication Incentive Structures

5 Replies

What are some of the structures that you have seen work (ideally in your own funds, i.e. people with experience)? I am familiar with the model of LLP for fixed investment, return in X years. What about more active partnerships? Yearly distributions and otherwise. Just want to hear what people have experienced.

@Trevor Ewen

We have a number of active investment LLCs and we always pay out 90-95% of free cash flow every quarter to each holder. The payment of the profits are split 80/20 with the passive investors (us getting 20). We try to focus the longevity of the investment period but market forces can either accelerate or delay such plans so it is always at our discretion. Hope the info helps.

I've had the most success with offering a preferred return followed by a waterfall after the pref is met. The waterfall provides a profit split that increases to the sponsor as specific return hurdles are exceeded.  As an example, the investor receives:

  • 100% of the cash flow until reaching an 8% return (called a "preferred return"), then
  • 70% of the cash flow until reaching a 12% return, then
  • 60% of the cash flow until reaching a 15% return, then
  • 50% of the cash flow thereafter

The split percentages and return hurdles can be slid around and hurdle tiers can be deleted to achieve the desired result. For example, if the deal is really weak you'll have to delete tiers and slide up the splits to deliver an attractive return.

Your experience and investor relationships will also drive your decision on the structure. If you don't have a lot of experience and you don't have deep relationships with investors, you'll have to tilt the waterfall further in the investor's favor in order to attract capital.

@Bill Pohl

Your 20% comes with no money in the deal, correct? Sweating and working for that stake.

@Brian Burke

Great feedback. I am trying to balance the fact that most of our investors want some early feedback on how the fund is doing. That being said (and I am like this as well), once something is cash-flowing, we'd rather take the income and slowly put it back into other investments. To me, this is more useful than pulling it out altogether. At that point, I just need to find a new home for the money (not a terrible problem to have).

@Trevor Ewen

We always have an cash ownership stake in the LLC. Besides getting our payout for our cash like everyone else from the 80%, we also get the 20% for our efforts in guiding and maximizing the profits of the LLC.

@Bill Pohl

Understood, so you view your financial stake as essentially a separate partner from your sweat efforts. I like it, very reasonable from the perspective of a would-be funding partner.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here