Syndications

[Account Closed]

I'm looking to invest into a Multi Family Syndication deal and I noticed that the sponsor fees vary from about 1%-3%, depending on the deal. Is that fee usually based on the selling price or do they include rehab money too.  Example, a $2mm price and $500k rehab, would the sponsor fee be based on the $2mm or $2.5mm. Also, what are the other fees that are usually included?

Thanks!

[Joel Owens]

Andrew there is not a standard rate.

Buying into a stabilized asset takes less intensity for a sponsor than a value add project.

Sponsor fee of 1% is very small unless the upside equity is large. Usually 3 points you see often.

50% of the upside is also common. For very large deals 25 to 30%. Every activity a sponsor does they should get compensated for because if they were not doing someone else would have to be paid to perform the function.

Some people might take less for fees but they have less experience which can put your capital at greater risk with the management and disposition of the asset. Managing it correctly during ownership helps to make sure investors are getting the projected cash flow returns as dividends and then there is a profit upon the sale.

For instance I make six figures per transaction usually brokering commercial real estate for clients buying directly. If I have to be a sponsor with more time invested my upside has to be significant otherwise it's not worth my time to do it.

I would focus on the experience and track record of the sponsor and quality of the investment you are buying into more so than how much fees a sponsor is making. Points up front and then for example where the sponsor takes a percentage of the cash flow ONLY after the investors have been paid. If there is not enough the sponsor doesn't get paid that month. Also if the property has lost value since acquisition then no fees should be paid out to the sponsor when selling. The sponsor wants the property to do well when they have the equity stake on the upside. Aligned interests for all is key on syndicated deals. Slant too much in favor of the passive investors the syndicator loses drive to perform. Too much in favor of the sponsor they also can get lazy and not perform as the upside is little to them.

So the sweet spot is in the middle. They make a good amount on the front end and then have to keep performing to see the larger payout at the end.