All Forum Posts by: Yosef Lee

@Yosef Lee the sponsor would be the managing member of a manager-managed LLC or the general partner of a limited partnership. No equity interest in the LLC or LP is required.

There is a common misconception that being a sponsor in a multifamily syndication is a cash flow business. It is not. When you sell the property you will have a payDAY, but during the hold you don’t get a payCHECK. This is a fee-based business where you get an acquisition fee up front for your efforts and a small asset management fee along the way. You won’t be quitting your day job any time soon just because you did one large apartment syndication.

The reason is because of a preferred return to the investors, they get 100% of the cash flow until reaching the preferred return hurdle. Only then do you start participating in cash flow. Most properties take a couple to a few years to throw off enough cash flow to exceed the hurdle.

You might often hear a different take on all of this in the seminar and podcast circuit from sponsors that do this differently—such as no preferred return to investors and sharing in cash flow immediately. What they don’t tell you is that they struggle to raise capital and only do one or two deals. Then they go on the teaching circuit because it’s the only way to make money. Take it from a 30-year vet who has raised well over a hundred million—it doesn’t work that way if you want to scale. It works just as I’ve described here.

Brian, Your answer is absolutely golden to me. Thank you so much! Yosef

1 Vote

Originally posted by @Greg Dickerson:

Originally posted by @Yosef Lee:

Originally posted by @Greg Dickerson:

Originally posted by @Yosef Lee:

Thank you Brian,

I had the wrong idea after I read a transcript of one of the Michael Blank's podcasts which said "So typically, as a syndicator you get a certain amount of equity simply for being the syndicator. Normally between 10% and 30% the deal is the syndicator or the general partnership. And the investors for bringing in the money get the rest. So for example, an 80/20 split, the investors bring in all the money for 80%, you as a syndicator get or retain 20%. So you actually get paid profits along the way." - https://flipnerd.com/rei-class...

So, Michael Blank must be talking about what you just explained to me.

Thank you so much for the clarification. I appreciate that.

Just one more follow up question then, from your answer "Generally the sponsor is an entity (Corp or LLC) and is the managing member or general partner of the property ownership entity. The promote flows to the manager/GP so by default that means it flows up to the sponsor's entity."

How can the sponsor be the managing member or general partner of the property ownership entity without actually owning any equity in the property ownership entity? Are you referring to a manager of a "manager-managed LLC"?

Thank you for your answer in advance. Yosef

You may have heard Michael incorrectly or he misspoke. Some people think profit splits are the same as equity but as Brian explained they are not the same. Where it gets confusing is the property will build equity as debt is paid back and the property appreciates which increases the equity in the property but that is not realized until the property sells or is refinance and that’s when profits are split and if all return hurdles have been meet the sponsor receives their share of the profits which is the promote.

The sponsor entity is the GP. This entity will be the managing member of the property LLC along with the LP members.

Thank you Greg! So the GP does not get any share from the monthly cash flow check. Right? (unless they had put their own money and got true equity). I thought (since I had the wrong idea that GP gets some portion of equity until now just for being a GP) the GP will also share the monthly cash flow pro-rata on top of the asset management fee. But now I know it's not the case. As you said, the promote split (e.g. 20:80) is reserved until the realization by refi or sales. Thank you again for the clarification. Just a quick final question then. How can the sponsor (GP) be the managing member of the property LLC along with the LP members without actually owning any equity in the property LLC? To be a managing member, you have to be a member in an LLC which means you have an equity interest in it. Are you referring to GP's being a manager entity of the property LLC which was set up as a manager-managed LLC as opposed to a member-managed LLC?

This was part of a reason why I believed in the first place that the GP also retains some equity just for being a GP of the deal as it is being called a managing member. Hope this question makes sense to you. Thank you in advance. Yosef

You are confusing equity with cashflow (profits). Michael Blank spoke incorrectly on that podcast. The GP will receive their share of the cashflow above the preferred return and according to the split. If it 80/20 like your example once the pref is met the GP would get 20% of the cashflow. This is profits not equity. Refer back to Brian's post as he explained it very well.

I'm getting it now. Thank you so much Greg! Yosef

0 Votes

Originally posted by @Greg Dickerson:

Originally posted by @Yosef Lee:

Thank you Brian,

So, Michael Blank must be talking about what you just explained to me.

Thank you so much for the clarification. I appreciate that.

Thank you for your answer in advance. Yosef

The sponsor entity is the GP. This entity will be the managing member of the property LLC along with the LP members.

0 Votes

Originally posted by @Brian Burke:

The sponsor doesn’t get any equity unless they contribute capital. If they do contribute capital, they would hold title in whatever manner the capital was contributed. If a principal of the sponsor group committed personal funds they would hold the interests personally. If it was company cash, they would hold the interests in the company name.

Having said that, I think that when you refer to “30% equity” what you are really referring to is a promote, which is not equity, it’s just a split of cash distributions. Since this isn’t “equity” the promote isn’t “held.” The investors own 100% of the equity but are only entitled to 79% of the cash flow, in your example.

Generally the sponsor is an entity (Corp or LLC) and is the managing member or general partner of the property ownership entity. The promote flows to the manager/GP so by default that means it flows up to the sponsor's entity.

- I meant to reply to you but accidentally put it as a new post below, I'm putting this again -

Thank you Brian,

So, Michael Blank must be talking about what you just explained to me.

Thank you so much for the clarification. I appreciate that.

***Just one more follow up question then***, from your answer "Generally the sponsor is an entity (Corp or LLC) and is the managing member or general partner of the property ownership entity. The promote flows to the manager/GP so by default that means it flows up to the sponsor's entity."

Thank you for your answer in advance. Yosef

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Thank you Brian,

So, Michael Blank must be talking about what you just explained to me.

Thank you so much for the clarification. I appreciate that.

Thank you for your answer in advance. Yosef

0 Votes

Dear BP members, first of all, Happy new year!

This newbie is troubled to understand something. Let's say you have an investment company. (like Joe Fairless' Ashcroft Capital or Michael Blank's Nighthawk Equity) Through the company, you find the deal and take all necessary GP steps including doing due diligence and bringing investors, etc. Further, you decided to form an LLC to purchase the deal with GP:LP equity split of 30%:70% on top of the usual acquisition fees, etc. All LPs agreed to it.

Q#1: Now, would you (as an individual) get named as a member holding 30% along with other LP investors holding 70% in the operating agreement, or would your investment company be named as a member holding 30% equity? or would you have a 3rd separate master holding company to hold the 30% equity?

Q#2: And eventually, you will put your investment company as a manager of purchaser LLC of the deal, right?

Hope my question makes sense. Any comments will be greatly appreciated. Thank you and happy new year again!!

Yosef

3 Votes

@Alina Trigub

Thank you. I will go and check out Samofinancial.com.

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@John Fortes

Hi John, thank you for your response. Yes I decided to do what you are doing. Keep them all separate. Thank you!

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@Andrew Graziano

Thanks Andrew for sharing. I can’t wait to put up a post like this after my first deal!! Keep up the good work!

0 Votes

@Alina Trigub

Exactly! Good luck with your platform and let me know when it’s ready I will listen to it!

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All Forum Posts by: Yosef Lee

Yosef Lee has started 6 posts and replied 225 times.

Post: Is GP taking the equity in the deal as a company or individual?

Post: Is GP taking the equity in the deal as a company or individual?

Post: Is GP taking the equity in the deal as a company or individual?

Post: Is GP taking the equity in the deal as a company or individual?

Post: Is GP taking the equity in the deal as a company or individual?

Post: Is GP taking the equity in the deal as a company or individual?

Post: Did you form a formal biz entity for thought leadership platform?

Post: Did you form a formal biz entity for thought leadership platform?

Post: Reflecting on my first 5-unit deal and some refinancing questions

Post: Did you form a formal biz entity for thought leadership platform?