How Apartment Syndicators Make Money

Are you interested in investing in a multi-family real estate syndication?

And if so, are you sure who gets paid, how they get paid, and how all of that stuff works?

In this article, I'm going to walk you through how the general partnership or the syndicator earns their keep in the deal. It's important to understand how both sides of a syndication earn money.

Basically, there are three ways syndicators or the general partnership earn money in a deal:

1. Fees

We can have all sorts of fees. It's going to depend upon the syndicator themselves, the property, and the project. As you may already know, every deal is different. It may require something different or a little more finesse in one area. But we're just going to be talking generally today.

There are basically three kinds of fees that may get charged or earned by the syndicator:

A. Acquisition Fee

The general partnership goes out and hunts for the deal. They hunt for the opportunity. They will be writing LOIs (letters of intent). They will be negotiating offers, doing inspections, putting in a whole lot of money and effort into finding the deal for the syndication to take down and acquire. And whenever the syndication closes on a deal, it's very common for the general partnership to earn an acquisition fee. This can range from 1-3 percent, depending on the situation.

Now, every situation is different. So again, just take this as a generalization. And this fee allows the general partnership to recoup those costs that were incurred in hunting for the deal. As you may know, the process is really time intensive and there are quite a few costs involved in that.

B. Construction Fee

This is also called a construction management fee. Maybe the deal requires very heavy lifting in terms of renovations. So the general partnership has brought on somebody specifically to oversee the construction and renovation component. If there's a lot of work to do, it takes a lot of money and time and due diligence to make sure it runs properly. So the GP (general partnership) may charge a construction fee to oversee that project if it's really heavy duty.

C. Refinance Fee

After the value-add strategy has been put into place, maybe it's been a couple years. The property has appreciated, whether through market appreciation or forced appreciation. And the general partnership feels it's a great time to refinance, pull money out, maybe return it to some of the investors so the investors can receive some of their capital back early.

Doing a refinance on a property again takes a whole lot of work. And oftentimes, in OMs and PPMs there's going to be a refinance fee worked in. Oftentimes it's charged as a percentage of the dollar volume of the debt being placed on the property. And this really just allows the general partnership to be compensated for the time and expenses that went into refinancing a multi-family property.

The process is a bit different than refinancing your home. With all of these fees, they are all going to be laid out in the deal documentation that you sign when you invest in the deal. So everything's going to be on paper. There will be no surprises. But it's important to understand some types of fees that may be charged.

Now there are many different ways that you can slice and dice fees and there are others I haven't talked about. But generally speaking, these are going to be the main ones you will find.

2. Cash Flow

During the hold period, the property is yielding a positive cash flow. So every month or every quarter — depending on how the deal is structured — you as the investor will receive a check. Now the general partnership — depending on how things are structured — will also receive a check for their share of the cash flow.

So let's say for instance the split is 70/30 which is a common split in the industry. So that means 70 percent of the cash flow goes towards the limited partnership (the passive investors) and the 30 percent would go towards the general partnerships (the GPs or the syndicators). This is very common. There is something called a preferred return or a pref return. So we've got the fees that are usually charged when something happens in the deal. And then we have the cash flow. This is on a monthly or quarterly basis. And again this is split.

Every deal will be different, depending on the deal itself, the syndicators, etc. But generally speaking, it’s going to be around a 70/30 split — 70 percent in favor of the limited partnership (the passive investors) and 30 percent going towards the GPs.

3. Equity

So far, we've already covered how fees are earned. Usually these are event-specific fees. So something has to happen for these fees to be earned. Then we have the cash flow, which is paid out on a monthly or quarterly basis. And now we have the equity.

So let's say we've implemented our value ad plan. So we've forced appreciation of the property. The property's gone up in value and now we're able to sell and hit our return targets. So what happened is the property goes up for sale, we accept the contract, we go through the closing process, and once the property closes we have a big fat check. And the proceeds of that sale are going to be split almost always according to our cash flow split.

So in this case, let's say we have $1,000,000 of proceeds from the sale. So 70 percent or $700,000 would go towards the LPs. And then we have 30 percent, which would go towards the general partnership, the GPs. Now concerning syndications and holding real estate in general, the monthly or quarterly cash flow is like the bread crumbs — they are small amounts during the hold period but then later you get the full cake, as it were.

You have the full cake when you sell. So you get the breadcrumbs in terms of the cash flow, and then you get the big check at the end. Now this is where both the investors and the syndicators or GPs earn their money. It’s a big fat check and then you can take that and reinvest it in a deal.

The Bottom Line

All in all, I'd like to simplify things. So obviously there are more complex ways that you can factor things in, but generally speaking, you're going to have your fees. Then you have your monthly or quarterly cash flow. Then you have the equity. That's going to be split according to all the syndication documents but 70/30 can be considered the industry standard.

The whole reason we have these splits is to really incentivize the general partnership to do well on the deal. Because obviously, the more cash flow the property generates on a monthly or a quarterly basis, the more the general partnership is able to earn on it — just like the more the investors are able to earn too. And the more we can force the appreciation of the property through the work of the general partnership, the more the general partnership can benefit because they're going to earn more money. The same goes with the passive investors.

So think of it this way. We have the fees. These are really just to compensate for time and expenses — the acquisition fee, construction management, and refinance fee. The real money that is made by the syndicators (and also by the passive investors) is on the cash flow. But it's really upon the disposition of the property when you sell that you realize all of your gains. This is where the money is made and this is why syndicators work so hard during the whole period, implementing the business plan, making sure investors are compensated when it comes time to sell. Yes, this is where the real money is made.

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