Syndication deal structure - seeking opinions

[David Cas]

Hi -

I'm an investor & new partner working on a $1M+ deal with a syndicator / sponsor. Here's how the deal is being put together:

- Property ownership: Syndicator ~80%, rest split among investors depending on amount invested. ($100k investment would get 10% ownership on a $1M deal)

- Cashflows: Investors receive up to 12% annual return on their investment paid monthly. Investors get paid if NOI is positive for the month. Syndicator has preferred return for first $500, any free cashflow beyond 12% goes to syndicator. Expenses split according to ownership stake (in this deal, syndicator has responsibility for paying 80% of expenses)

- Additional details: Mortgage under syndicator. Syndicator put the deal together end-to-end (finds deal, negotiates, closes, sets up LLC, works with lawyers/banks/accountants/management companies, etc)

I have a good relationship with the sponsor and am simply looking for an opinion as this doesn't seem to fit your traditional syndicated deal structure.

Thanks!!

[Brian Burke]

Wow...this structure is heavily tilted in favor of the sponsor.  If the investor's return is essentially capped at 12%, the deal more closely resembles a debt deal than an equity deal.  A debt deal with added downside, that is.

I'm not sure I understand the concept of the sponsor retaining 80% ownership if the investors are contributing 100% of the capital.  Typically, the entity that is created for the deal will own 100% fee title to the property subject to any assumed or originated secured debt.  Within the entity, units or partnership interests are "owned" typically in the same proportion to the profit split or contributed capital.

If the syndicator has enough folks to fund the deal with that structure, more power to them, but it's not scalable.  Once they tap out their inner circle they won't attract capital for their next deal with those terms.  Then they will be promoting deals with much more favorable terms to the investor and you will be on the inside looking out while new investors are making better returns than you.