How My Partner and I Structured Our First Syndication

[Collin Van der Veen]

$264K Debt
$50K LP Equity (71%)
$20K GP Equity (29%)

LPs and GPs receive an annual 8% preferred return. Any excess cash is distributed pro-rata as a return of capital.

In the event of a refinance or sale (targeting 5-7 years), capital is returned pro-rata until LP and GP capital balances are brought to zero.

Once all capital is returned, excess cash is distributed in 50/50 proportion (GP promote).

Biggest lesson learned: always raise sufficient reserves.

While we did make sure to raise some extra cash, we should’ve raised a bit more in hindsight (it was uncanny how our gutters seemed to know to fall off the house as soon as we closed the deal).

Having a solid rainy day fund at the outset is well worth the marginally higher preferred return you’ll have to pay as a result.

[Brock Mogensen]

100% agree and I like the structure.  My biggest mistake on my first syndication was not raising enough reserves as well.  Something is always going to go wrong that you didn't account for and having that extra capital in reserves will save you.

[Chris Seveney]

@Collin Van der Veen

What is also important is to keep it simple which you did. Great job. Some people get cute with waterfalls and have multiple hurdles which makes it more difficult to understand

[Anand Adusumilli]

very simple structure for the first deal.

Couple of curious questions to understand further,

what are all the fees at acquisition, ongoing and exit and how much? that goes to GP.

And, what type of property is it? any improvements need to be put in before generating monthly cash flows?

[Collin Van der Veen]

Thanks, @Chris Seveney and @Brock Mogensen for the thoughtful replies.

@Anand Adusumilli - we did not charge an acquisition fee since it was our first time raising capital and we felt we needed to establish a track record prior to doing so. Our "performance fee" as the GPs will come when we exit - GPs contributed 29% of the equity but we are entitled to 50% of the profits once all investors are paid back. 

The property is a duplex that we converted to a student rental property in our college market. The property was rent-ready when we bought it but we sank about $5k into it in immediate improvements.

Thanks for engaging!

[Bob Willis]

What kind of legal structuring did you need in place to do this? Was there much overhead there? How did you find your LP, I assume these were friends and family on such a small deal. What are your plans moving forward (next deals). Congrats on the deal.

[Don Konipol]

Quote from @Collin Van der Veen:

Thanks, @Chris Seveney and @Brock Mogensen for the thoughtful replies.

@Anand Adusumilli - we did not charge an acquisition fee since it was our first time raising capital and we felt we needed to establish a track record prior to doing so. Our "performance fee" as the GPs will come when we exit - GPs contributed 29% of the equity but we are entitled to 50% of the profits once all investors are paid back. 

The property is a duplex that we converted to a student rental property in our college market. The property was rent-ready when we bought it but we sank about $5k into it in immediate improvements.

Thanks for engaging!

Well done!

[Jordan Northrup]

Hi Collin, I loved reading this. I have 15 units now and I'm looking to take on LPs in order to scale faster and bigger. Your structure made good sense to me. I do have a couple of follow ups if you'd entertain them. 

If I understand correctly, the LPs and GPs each have skin in the game. You offered an 8% return to both, and if the property were to sell, all capital contributions are zeroed out and profits split 50/50. With that in mind, 

1. Is there a shelf-life to the property? Unless the LP is comfortable with getting 8% annual returns indefinitely, at some point they'll want their capital back. How do you handle that situation? 

2. What happens if one of the LPs wants out? Say it's year 3 and LP1 who invested $10,000 wants out. That's $10,800 you'd have to come up with on the fly. How does your structure handle that sort of situation? 

Thanks in advance!

[Gaetano Ciambriello]

That is awesome! What market are you in @Collin Van der Veen

[Collin Van der Veen]

Thanks @Gaetano Ciambriello

I am in the Maine market as an investor and Boston as my primary

[Collin Van der Veen]

Thanks @Jordan Northrup!

1.) We pitched the investment as a 5-7 time horizon so we plan to refinance and cash out our LPs around then.

2.) If an LP wants out, they can sell their stake to another LP or to another investor only with unanimous approval from other partners.

Hope this helps!

[Don Konipol]

Quote from @Collin Van der Veen:

Thanks @Jordan Northrup!

1.) We pitched the investment as a 5-7 time horizon so we plan to refinance and cash out our LPs around then.

2.) If an LP wants out, they can sell their stake to another LP or to another investor only with unanimous approval from other partners.

Hope this helps!

You did great!  The only advice I have is to put your investors FIRST (I am sure you will!). They speak with each other and can be a great influence (positive or negative) on new investors.  You want to get to the point where investors are calling you asking when they can invest in your next deal.  

[Collin Van der Veen]

Great point @Don Konipol. Thanks for sharing - I definitely plan to keep my investors happy, especially on this first deal to keep the capital flowing into future ones!

[Jordan Northrup]

Quote from @Collin Van der Veen:

Thanks @Jordan Northrup!

1.) We pitched the investment as a 5-7 time horizon so we plan to refinance and cash out our LPs around then.

2.) If an LP wants out, they can sell their stake to another LP or to another investor only with unanimous approval from other partners.

Hope this helps!

 Thank you!

[Jon A.]

Thanks for sharing. How did you go about finding your LPs?

[Lien Vuong]

Sweet first deal!

[John McKee]

If it's a duplex don't they sell based on the residential market or do they sell based on cash flow?  How are you increasing the value or cash flow with this property.  Let us know the strategy.

[Adrian Mahdian]

Looking to partner up with a "boots on the ground" type of person in Texas just to be sure things go as planned.

I can have the property manager check in on things but I think giving sweat equity to this person might be a better way. I will be looking for deals, finding contractors and doing everything basically from overseas, everything that CAN be done from overseas. So I will not be a silent partner.

2))) If you were partnering with someone in another state that was overlooking the operations etc, how much would you require them to put into the deal from their own pocket? 0%? 10 or more? to make sure they have skin in the game... @Collin Van der Veen @Brock Mogensen

And HOW MUCH extra equity goes from you to them just to make sure they are compensated for their extra efforts of physically checking things and bringing value to the project? 

I will be looking for deals and will be very active in all phases, this will be my job basically... So the question is how much of a split and in what situation?

[Brock Mogensen]

Quote from @Adrian Mahdian:

Looking to partner up with a "boots on the ground" type of person in Texas just to be sure things go as planned.

I can have the property manager check in on things but I think giving sweat equity to this person might be a better way. I will be looking for deals, finding contractors and doing everything basically from overseas, everything that CAN be done from overseas. So I will not be a silent partner.

2))) If you were partnering with someone in another state that was overlooking the operations etc, how much would you require them to put into the deal from their own pocket? 0%? 10 or more? to make sure they have skin in the game... @Collin Van der Veen @Brock Mogensen

And HOW MUCH extra equity goes from you to them just to make sure they are compensated for their extra efforts of physically checking things and bringing value to the project? 

I will be looking for deals and will be very active in all phases, this will be my job basically... So the question is how much of a split and in what situation?

 Depends on the deal size.  Generally we (as the GP's) put a total of 15-20% of the equity into the deal

[Adrian Mahdian]

@Brock Mogensen
Okay that's helpful, that shows you are ready to put your money on the line! 

And would you own 50% of the cashflow and 50% equity after going in with 20%?

If you were partnering another active partner but you were checking on the contractors and making sure things were going as planned what would be the profit split?

// Adrian

[Brock Mogensen]

Quote from @Adrian Mahdian:

@Brock Mogensen
Okay that's helpful, that shows you are ready to put your money on the line! 

And would you own 50% of the cashflow and 50% equity after going in with 20%?

If you were partnering another active partner but you were checking on the contractors and making sure things were going as planned what would be the profit split?

// Adrian

 There's a million different ways to structure syndications.  On the first few syndications I did, we just did a straight 80/20 split, no pref.  Now we always offer a pref to generally a 70/30 split.