The following is adapted from Syndicating Is a B*tch.
Many if not most syndicators put their own money into deals, so you’ll want to understand how that impacts what you’ll take out. If you’re ready to become the syndicator, there are a few ways that the sponsor can be compensated. All of it is optional.
You don’t have to charge certain fees or structure your deal in any specific way. Nonetheless, this article should give you an idea of the different ways we’re compensated for our work, so you know what you might be walking into.
Acquisition and Disposition Fees
A lot of work goes into getting a deal under contract and closed. The syndicator has to come up with earnest money, juggle paperwork, oversee and pay for inspections, and more—and sometimes it happens multiple times before you can actually get to close. To compensate for that work, you can build an acquisition fee into the deal.
The acquisition fee is typically 1-4 percent of the purchase price, which you can imagine might be a very high number. If you are purchasing a $20 million asset with a 4 percent acquisition fee, that’s an $800,000 fee on the day of closing.
The disposition fee shows up on the other end of a deal when it’s time to sell. There’s not as much work involved in the sale of a property as in the beginning purchase, but it’s still a lift.
Usually, the disposition fee is in the 1-2 percent range. This disposition fee comes out of the sale price, as a cost of closing, directly to the syndicator, typically before the profits are split between the investors and syndicator. A common arrangement is to have a 2 percent acquisition fee and a 1 percent disposition fee.
Property Management Fee
This is the fee for managing the property itself. Most of you will hire an outside company to handle this for you, and you will pay this fee to them. If you do decide to manage the asset yourself, you will pay your company this fee—which will range between 4-10 percent of all collected income paid monthly on smaller properties, up to about one hundred units.
Once you pass one hundred units, 3 percent seems to be the norm. Your lender will likely insist that you hire an outside experienced property management company on your first deal or two.
Asset Management Fee
If you decide to manage the property yourself through your own property management company, you will be the one hiring the onsite staff and overseeing them. Asset management, with or without managing the property yourself, isn’t a passive position. You are sending regular updates to your investors, sending out quarterly distribution checks, and heading any meetings you might need. You’re also working with the lender to stay in compliance with your loan documents. The asset management fee compensates you for all of that headache.
This fee is usually between 1-2 percent of all collected revenue paid monthly. As you have probably noticed by my use of the words typically and usually, these fees can vary as they are negotiated. These are just guideline amounts.
Since we’re talking about your first deal, I’m not going to get into the specifics of how to self-manage. Few banks will give you that option off the bat—though you might have the leeway in your loan documentation to switch to self-management after a predetermined length of time. Be clear about what your limitations in the loan are and stick to them, or the bank could call the loan and want all the money back.
The Promote (or Override)
There are so many variations to the compensation structure that I could probably write a book on those alone. But I’m not a lawyer and don’t have any interest in getting that detailed. So the last one we’ll get into is the “promote.” It’s yet another way you can be compensated for the headache, liability, and stress.
The promote is taken from the profitability of cashflows, from sale, if you do a cash-out refinance, or any other time cash goes out to the partnership. Basically, if cash goes out, the promote is paid.
If a promote structure is set up as 80/20 (a common split), 80 percent of all distributed cash would go to the investors, and 20 percent would go to the syndicator. It’s your way to make a living, otherwise, you wouldn’t be able to do this.
Typical promote structures are 80/20 or 70/30, though I’ve seen them as high as 55/45 and as low as 90/10. In any case, the larger number will typically go to the investors. If you invest as well, and you probably should on your first deal or two to add to your investors’ comfort level with you having no experience or track record, you also take a share of the 80 percent. If you invest 10 percent just like everyone else, you’ll get the 20 percent promote, plus your pro-rata share of the investor distribution.
Preferred Return
One more fee you should consider when structuring a deal is the preferred return. The preferred return is compensation for the investors only, not the syndicator.
To understand a preferred return, let’s say we have $100,000 in profit to distribute to the investors. In our example above, the syndicator takes their $20,000 promote right off the top of that amount before the rest is distributed to the investors. A preferred return protects some investor return, even if that means the promote isn’t fully covered.
If the preferred return is set at 6 percent, the deal sponsor won’t get their promote until the preferred return (6 percent per investor) has been distributed. A preferred return is not a guarantee in any way; it simply states that the syndicator/sponsor won’t get their promote until the limited partner investor gets their 6 percent.
The preferred return is especially helpful on your first deal because it represents another layer of comfort level for investors. It can hurt returns for the syndicator, but it can reassure the investor that the system is working in their favor. The syndicator doesn’t get rewarded unless the investor has gotten a minimum return first.
Know What to Expect
Once again, these compensation structures are not the be-all, end-all, exhaustive summary of revenue streams. You and your attorney can work out all sorts of things to get you and your investors paid.
But they are some of the most common, and you need to understand these terms if you’re going to build a successful deal. Naturally, your familiarity with common payment structures will also communicate to investors that you know what you’re talking about.
Be prepared to consider other forms of compensation and continue to learn. Now that you have a basic idea of the framework, however, you can go into conversations about remuneration with a little more understanding and confidence.
For more advice on syndication fees and dividends, you can find Syndicating Is a B*tch on Amazon.
Known in the real estate world as the Apt-Guy℠, Bruce Petersen is a serial syndicator who started with a 48-unit building and has now syndicated over 1,100 units. As the founder and CEO of Bluebonnet Asset Manager LLC and Bluebonnet Commercial Management, Bruce has received local and national recognition for his syndication efforts. He was the recipient of the Austin Apartment Association’s Independent Rental Owner of the Year for 2016 and the National Apartment Association’s Independent Rental Owner of the Year for 2017. In addition to being a TV personality and public speaker, Bruce also mentors people on how to invest in apartment complexes.
