How Are Syndications Structured?
- Thousand Doors Group
- Dec 15, 2022
- 4 min read
Updated: Dec 16, 2022
It is reasonable for prospective investors to have a lot of questions regarding the way apartment syndications are structured.
It is only fair that you understand your rights as a limited partner, the fees you may be asked to pay, and the timing around the process of receiving your money back if you are going to trust us with your money that you have worked so hard to acquire.
The following are the six primary components that make up the framework of a multifamily transaction:
The Entity
Equity Splits
Control and Voting Rights
Return of Principal
Sponsor Fees
THE LEGAL ENTITY
The limited liability corporation, sometimes known as an LLC, is the form of legal entity that we work with to structure multifamily syndication deals.
On occasion, we may establish various legal companies, including a holding corporation that will be registered in Texas or Delaware as well as a local entity that will be established in the state in which the property is situated. The holding company is the owner of the local limited liability business, while the local corporation owns the building itself.
EQUITY SPLITS
Equity splits vary, however, both 70/30 and 80/20 are common. For instance in a 70/30, the limited partners (LPs) get 70% of the ownership, while the general partners (GPs) receive 30%.
Despite the fact that the investors are the ones who put up all of the capital, the operator is entitled to a portion of the equity known as carried interest as compensation for putting the deal together.
My recommendation is that you pay less attention to the split and more attention to the returns, particularly the average annual return. It is much more important to have a good quality syndication deal, a strong operator, conservative underwriting, and an AAR of more than 15% than it is to have a particular equity split.
PREFERRED RETURNS
Some apartment syndications provide their investors with something known as a "preferred return," which indicates that the investors receive a specific minimum payment before the general partner receives payment.
One way to think about it is as an interest payment, which is paid out initially before the remaining cash flow is shared based on the equity arrangement. Another way to think about it is as a dividend payment.
Let's do a simple example.
Let's say that a certain syndication offers investors a return of 70% on their investment, with the remaining 30% going to the operators in the form of carried interest.
Further, let's presume that the total cash commitment from the investors is $100,000, and that the preferred return is 7% of that amount. That translates into the investors receiving the first $7,000 of any potential cash flow during that year, and then the remaining cash flow being split 70/30 between the investors and the business.
CONTROL AND VOTING RIGHTS
Being a limited partner requires accepting a degree of limitation. Generally speaking, limited partners (LPs) do not play a significant role in the day-to-day management of the properties you invested in, and the general partner (GP) is the one who makes all of the operational decisions.
RETURN OF PRINCIPAL
The question now is HOW and WHEN you will receive your principal. By use of any of the following two liquidity events:
Refinance
Sale
The hold period for an apartment syndication is outlined in the business plan for the transaction. If everything goes according to plan, the typical hold period of an apartment for us is between four and six years..
SPONSOR FEES
If you are an LP participating in an apartment syndication, there are five different costs that you could be requested to cover:
Acquisition Fee
Asset Management Fee
Capital Transaction Fee
Disposition Fee
It’s customary for an apartment operator to charge the fees below:
Acquisition fee:
This charge ranges from 2% to 4% of the purchase price, and it is due to the GP at the time of closing.
Asset management Fee:
It is typically between 3-5 percent of the total rents received each year. This money is used by GPs to cover the overhead costs associated with operating the property.
Capital Transaction Fee:
It is typically between 1-2% of the capital event, such as a cash-out refinance.
Disposition Fee:
It is also typically between 1-2% of the sale price at the end of the hold period of the apartment.
It is definitely important to know what are the common fees charged by the operators in a syndication deal, however, it's also important to understand that these fees are standard and are necessary in order for the operators to run the syndication deals as smoothly as possible. So I'd advise you to try not to get too worked up over the prices.
Please note that operators DO have overhead, and they use these fees to cover the costs so that they can continue providing services to the investors. The only real money operators make is on equity, which they earn when the value of the property goes up as a result of their efforts and improvements made on the property.
Congratulations! You are now aware of the structure of deals involving multiple apartment buildings, including what the various phrases signify and what you may anticipate throughout the process.
WE'RE HONORED TO BE IN BUSINESS WITH YOU
Building wealth doesn’t always require you to do all the work you normally would as an independent real estate owner/investor. You can also accomplish the same goal by taking advantage of a syndicated real estate project.
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