Shady Syndicator Stuff or Smooth Sailing?

9 Replies

Been evaluating several syndication opportunities lately and I've noticed a few things I've not seen before in this space (and even with the same operators).  I'm not going to call anyone out, but here are two main things I've run into which seem like total BS to me.  Let's see if you agree:

1.) Syndicator "Admin" Fee Changed from Flat % to Waterfall-type Split:  One group I have been dealing with historically did not charge an admin fee at all. Then they started charging a 0.50% annual admin fee. NOW, they have changed it so that after an investor receives a targeted IRR, that the investor's split changes and they take a % of the split. This is IN ADDITION TO an Asset Management Fee (and acquisition fee, etc.). I personally think this is complete BS and they're getting greedy to put it mildly.

EXAMPLE: 10% preferred return, then 50/50 split between investor/syndicator. Syndicator is essentially raising money for operating sponsor, so a middleman so-to-speak. After investor gets 10% IRR, there's an 80/20 split between investor and syndicator. So, basically, after an investor gets a 10% IRR, the split goes from 50/50 to effectively 40/10/50 (where the 10% - which is 20% of the investor's 50% - goes to syndicator raising money).

2.) Not Knowing Final % Split Until Deal Fully Funded: Another group I've been in talks with essentially cannot tell you upfront what the split will be between investors / sponsor.  There is typically a range, depending on how much money is raised.  They'll issue a certain number of A units, B units, etc.  They have a targeted amount of $ to raise.  They have a stated minimum and maximum (which can change the split).  In a recent offering, I think it ranged somewhere from 31% to 49% to investors, depending on how much $ was raised and how many Class A units were purchased by investors.  This seems backwards to me as previous deals I've invested in always state a definitive percentage upfront (70/30, 80/20, etc.).   The only thing this particular group declares upfront is a preferred return, if any.  Other than that, split is TBD.  I want to know what my split is going to be going into the deal and I also want it to be way higher than 50% in most cases.  It seems like this particular group's best case split scenario is 50% to investors (on top of a preferred return).

Is anyone else seeing these shenanigans with all the cheap money looking for a home out there or are my expectations just way out of line right now?  Really interested to hear people's thoughts.  I think the above two examples are very unfair to limited partner investors and I am shocked that these syndicators seem to have a relatively easy time raising money from likely unknowing "investors."

Originally posted by @Mark S. :

Been evaluating several syndication opportunities lately and I've noticed a few things I've not seen before in this space (and even with the same operators).  I'm not going to call anyone out, but here are two main things I've run into which seem like total BS to me.  Let's see if you agree:

1.) Syndicator "Admin" Fee Changed from Flat % to Waterfall-type Split:  One group I have been dealing with historically did not charge an admin fee at all. Then they started charging a 0.50% annual admin fee. NOW, they have changed it so that after an investor receives a targeted IRR, that the investor's split changes and they take a % of the split. This is IN ADDITION TO an Asset Management Fee (and acquisition fee, etc.). I personally think this is complete BS and they're getting greedy to put it mildly.

EXAMPLE: 10% preferred return, then 50/50 split between investor/syndicator. Syndicator is essentially raising money for operating sponsor, so a middleman so-to-speak. After investor gets 10% IRR, there's an 80/20 split between investor and syndicator. So, basically, after an investor gets a 10% IRR, the split goes from 50/50 to effectively 40/10/50 (where the 10% - which is 20% of the investor's 50% - goes to syndicator raising money).

2.) Not Knowing Final % Split Until Deal Fully Funded: Another group I've been in talks with essentially cannot tell you upfront what the split will be between investors / sponsor.  There is typically a range, depending on how much money is raised.  They'll issue a certain number of A units, B units, etc.  They have a targeted amount of $ to raise.  They have a stated minimum and maximum (which can change the split).  In a recent offering, I think it ranged somewhere from 31% to 49% to investors, depending on how much $ was raised and how many Class A units were purchased by investors.  This seems backwards to me as previous deals I've invested in always state a definitive percentage upfront (70/30, 80/20, etc.).   The only thing this particular group declares upfront is a preferred return, if any.  Other than that, split is TBD.  I want to know what my split is going to be going into the deal and I also want it to be way higher than 50% in most cases.  It seems like this particular group's best case split scenario is 50% to investors (on top of a preferred return).

Is anyone else seeing these shenanigans with all the cheap money looking for a home out there or are my expectations just way out of line right now?  Really interested to hear people's thoughts.  I think the above two examples are very unfair to limited partner investors and I am shocked that these syndicators seem to have a relatively easy time raising money from likely unknowing "investors."

 Okay, you've conveonced me, so start your own Syndication and let me know when it's available.

Originally posted by @Mike Hern :
Originally posted by @Mark S.:

Been evaluating several syndication opportunities lately and I've noticed a few things I've not seen before in this space (and even with the same operators).  I'm not going to call anyone out, but here are two main things I've run into which seem like total BS to me.  Let's see if you agree:

1.) Syndicator "Admin" Fee Changed from Flat % to Waterfall-type Split:  One group I have been dealing with historically did not charge an admin fee at all. Then they started charging a 0.50% annual admin fee. NOW, they have changed it so that after an investor receives a targeted IRR, that the investor's split changes and they take a % of the split. This is IN ADDITION TO an Asset Management Fee (and acquisition fee, etc.). I personally think this is complete BS and they're getting greedy to put it mildly.

EXAMPLE: 10% preferred return, then 50/50 split between investor/syndicator. Syndicator is essentially raising money for operating sponsor, so a middleman so-to-speak. After investor gets 10% IRR, there's an 80/20 split between investor and syndicator. So, basically, after an investor gets a 10% IRR, the split goes from 50/50 to effectively 40/10/50 (where the 10% - which is 20% of the investor's 50% - goes to syndicator raising money).

2.) Not Knowing Final % Split Until Deal Fully Funded: Another group I've been in talks with essentially cannot tell you upfront what the split will be between investors / sponsor.  There is typically a range, depending on how much money is raised.  They'll issue a certain number of A units, B units, etc.  They have a targeted amount of $ to raise.  They have a stated minimum and maximum (which can change the split).  In a recent offering, I think it ranged somewhere from 31% to 49% to investors, depending on how much $ was raised and how many Class A units were purchased by investors.  This seems backwards to me as previous deals I've invested in always state a definitive percentage upfront (70/30, 80/20, etc.).   The only thing this particular group declares upfront is a preferred return, if any.  Other than that, split is TBD.  I want to know what my split is going to be going into the deal and I also want it to be way higher than 50% in most cases.  It seems like this particular group's best case split scenario is 50% to investors (on top of a preferred return).

Is anyone else seeing these shenanigans with all the cheap money looking for a home out there or are my expectations just way out of line right now?  Really interested to hear people's thoughts.  I think the above two examples are very unfair to limited partner investors and I am shocked that these syndicators seem to have a relatively easy time raising money from likely unknowing "investors."

 Okay, you've conveonced me, so start your own Syndication and let me know when it's available.

 Looking for helpful comments, not sarcasm.  Thanks for playing.

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Originally posted by @Mark S. :
Originally posted by @Mike Hern:
Originally posted by @Mark S.:

Been evaluating several syndication opportunities lately and I've noticed a few things I've not seen before in this space (and even with the same operators).  I'm not going to call anyone out, but here are two main things I've run into which seem like total BS to me.  Let's see if you agree:

1.) Syndicator "Admin" Fee Changed from Flat % to Waterfall-type Split:  One group I have been dealing with historically did not charge an admin fee at all. Then they started charging a 0.50% annual admin fee. NOW, they have changed it so that after an investor receives a targeted IRR, that the investor's split changes and they take a % of the split. This is IN ADDITION TO an Asset Management Fee (and acquisition fee, etc.). I personally think this is complete BS and they're getting greedy to put it mildly.

EXAMPLE: 10% preferred return, then 50/50 split between investor/syndicator. Syndicator is essentially raising money for operating sponsor, so a middleman so-to-speak. After investor gets 10% IRR, there's an 80/20 split between investor and syndicator. So, basically, after an investor gets a 10% IRR, the split goes from 50/50 to effectively 40/10/50 (where the 10% - which is 20% of the investor's 50% - goes to syndicator raising money).

2.) Not Knowing Final % Split Until Deal Fully Funded: Another group I've been in talks with essentially cannot tell you upfront what the split will be between investors / sponsor.  There is typically a range, depending on how much money is raised.  They'll issue a certain number of A units, B units, etc.  They have a targeted amount of $ to raise.  They have a stated minimum and maximum (which can change the split).  In a recent offering, I think it ranged somewhere from 31% to 49% to investors, depending on how much $ was raised and how many Class A units were purchased by investors.  This seems backwards to me as previous deals I've invested in always state a definitive percentage upfront (70/30, 80/20, etc.).   The only thing this particular group declares upfront is a preferred return, if any.  Other than that, split is TBD.  I want to know what my split is going to be going into the deal and I also want it to be way higher than 50% in most cases.  It seems like this particular group's best case split scenario is 50% to investors (on top of a preferred return).

Is anyone else seeing these shenanigans with all the cheap money looking for a home out there or are my expectations just way out of line right now?  Really interested to hear people's thoughts.  I think the above two examples are very unfair to limited partner investors and I am shocked that these syndicators seem to have a relatively easy time raising money from likely unknowing "investors."

 Okay, you've conveonced me, so start your own Syndication and let me know when it's available.

 Looking for helpful comments, not sarcasm.  Thanks for playing.

Markets and deals change all the time.. I dont think you can classify this as shady as long as its disclosed up front.  If it works for you then fine.. if Not then pass and go to another sponsor .  I think one thing you will see ( and I am by no means an expert here) but as sponsor get more successful they can start lower the rate to investors and increase the income to themselves. To me thats a natural progression..  Kind of like the 10X guy..  He is so famous that he can demand lower returns to investors.. a sponsor starting out or not there yet may have to juice the returns to attract the investors.. as we all know sponsor is more critical than return in most instances.

I've seen the first, not the second. I am not defending either but I do know, the market changes constantly. Syndication groups come and go. The ones that last, adapt and pivot to the market and the demand. As mentioned, if it makes sense to you then it's worthwhile, if not pass. Covid changed quite a bit, even some no longer offering preferred returns at all and some who haven't paid out distributions since Covid started. 

I only mention because there is far more involved then simply returns. Risk tolerance, distribution schedule, asset management track record, past performance, trust and more are all worth varying degrees of returns, tax benefits, and the like to an investor. But as always it depends on the investor.

Originally posted by @Chris Levarek :

I've seen the first, not the second. I am not defending either but I do know, the market changes constantly. Syndication groups come and go. The ones that last, adapt and pivot to the market and the demand. As mentioned, if it makes sense to you then it's worthwhile, if not pass. Covid changed quite a bit, even some no longer offering preferred returns at all and some who haven't paid out distributions since Covid started. 

I only mention because there is far more involved then simply returns. Risk tolerance, distribution schedule, asset management track record, past performance, trust and more are all worth varying degrees of returns, tax benefits, and the like to an investor. But as always it depends on the investor.

 Thanks, Chris.  Makes sense. 

@Mark S. , it sounds like your scenario 1 is actually a fund of funds. Even if it is not technically the case, and the language you are referring to is baked into the partnership agreement that is actually controlling the real estate, the function is the same, at least for the waterfall split.  As for the fee, as others noted markets change and a sponsor's ability to layer in more fees becomes acceptable with longer/stronger track record.  If the admin fee is new, I would at least question it, but fees come, go and change.

Scenario 2 I have never seen.  Personally, I would not ever invest with a group that couldn't name their target raise and waterfall, but especially the waterfall.  As an LP my biggest focus is the projected net to LP returns and understanding the assumptions that go into that projection.  If the waterfall can and will move, it simply discredits the sponsor.  My mind goes to: how can a group know how to operate a deal, if they don't know how much money they can and will raise and how much they will offer the LPs.  Too many questions makes it too complicated, means I pass.

At the end of the day its all what an operator/sponsor can do for you. Fixating on fees and splits has really nothing to do with the deal. From a scarcity mindset pov yes I see the focus but if a reputable operator can offer your strong reliable returns then so be it. if you are looking for lower splits and fees then there are a myriad of MFH syndication schools out there with unproven track records giving 90/10 80/20 straight splits with no fees. That might be for you but personally I want more reliability. 

I don't get my haircut at the beauty school academy... I go to a professional to get it done right even though I might pay extra.

@Lane Kawaoka , we can talk about scarcity vs abundant mindset all day long - I'm sure that helps with whatever coaching you're selling.  That's not the point of the post.  No one is asking for a 99/1 split with no fees.  The point of the post was regarding a couple of items that simply seemed a bit "off" and cause for concern.  It's one thing to be upfront with investors about deal structure and fees and another to simply hide it inside a PPM or OA hoping investors are too lazy to notice.  I have reason to believe that in one of the two cases above that's what's going on.  

If your "professional" barber that you've received several haircuts from all of a sudden put their hand in your pocket for some extra tip money all the while you've already paid them fairly out of the other pocket and claims that they've decided to change things up and them reaching into your other pocket is disclosed on the backside of their haircut price menu in size 2 font at the bottom right-hand corner, you'd probably find a new barber - whether they're "professional" or not.

Hi @Mark S. I certainly understand your concern. There are so many syndicators and funds out there that the good news is you have a choice of many others who don’t do these things that feel funny to you.

I actually see potential problems with both of these deals. The problems with the second one are obvious. But it is also possible that the first one is structured illegally. In general, it is not legal to raise money for a deal where are you are not the principal. It’s possible that this one is structured legally, and there certainly are ways to do that. But I would really delve in and make sure. 

Like @Jay Hinrichs said, you and I can certainly go elsewhere.  But don’t forget the fact that it’s better to have 40% of $100 than 80% of $20.  The risk and track record and deal of the Sponsor should be taken into account.  Happy Investing!