Syndication FAQ's and Rule's of Thumb. Let's Collaborate.

[Daniel G.]

Hi everyone, I like to ask questions with some regularity to keep abreast of what my peers are doing in the multifamily syndication business. I'm looking to syndicate a deal for the acquisition of a 80-110 unit property, worth $2-5M, located in central Texas. I'm currently in the planning and underwriting stages and have scheduled to go raise funds with private investors within a month from now.

My question asks what your preferences are in regards to some common components of the PPM and overall strategy. I'll post them in bullet pt. form to make things a little easier to follow.

• Do you give investors a preferred rate of return? If so, what rate?
• What % do you charge for asset management fee?
• What compensation plan do you have structured for the deal? ( carried interest, hurdle rate, after 100% return, etc.)
• Do you allow the transferability of partnership interests, if so, how do you determine their value?
• Do you provide a capital calls provision on your PPM should you need additional funds?
• When you raise funds do you ask for working capital as well?
• Do you offer quarterly, semiannual distributions?
• What offers, services, or perks of any kind do your investors find most attractive?
• What are some common "low hanging fruits" that you have found limited partners like to hear when you pitch to them?

Any how, I thank you in advance. I know it's a lot of questions but that's what forums are for. I want to collaborate and soak myself with as much of your wisdom as I possibly can.

[Bryan Hancock]

Some of these questions are impossible to answer in the abstract.  It is good that you have a co-sponsor for your deals because the fact that you're asking them would probably indicate to a potential investor that you don't know your market and lack the experience to be a good steward of their funds.

The preferred return necessary to attract capital will depend on the type of project and your track record.  Are you doing stabilized projects or significant repositions?  I would say something in the 8-10 percent range is probably pretty typical, but it really depends on your ability to attract capital and your track record.  

Some syndicators charge asset management fees and some don't charge them at all.  There is nothing typical here.  Charging more in fees creates less alignment with investors, but you do need to make sure that the deal's cash flow is structured to compensate you for your effort and value delivered in service along the way.  The worst thing the investors could have happen is for you to avoid the project entirely because you're not being compensated properly for running it.  

The waterfall will depend on what you can attract.  A standard preferred return followed by a split is less complicated than having all sorts of complicated structures after X value is delivered.  However, it does make sense for you to participate more if you deliver more value.  This is impossible to comment on much without knowing more about your personal situation and how the capital is structured along with your track record.  

If you're using a Reg. D, Rule 506 offering then the partnership interests should not be freely transferable.  If you're using another exemption like Regulation A+ then the answer may be different.  This question is impossible to answer with the information presented.  In the event that interests need to be transferred there are various ways to do it, but a dutch auction generally discourages people from liquidating positions in a Reg. D offering.  I would encourage you to structure your offering in a manner that discourages investors from wishing to transfer their interests to the greatest degree possible.  This is overhead to manage and you should be seeking partners that wish to be in the deal for the duration instead of looking for you to provide them with liquidity.  

How capital calls are handled will depend a lot on the type of project.  In a large construction or major rehab scenario the likelihood you'll need more capital is a lot higher than it is for a more stabilized asset.  In general it will be unpleasant to request a capital call and your investors won't like it.  

Whether or not you need working capital will depend on the project.  This is impossible to answer in the abstract.  

We generally offer quarterly dividends in our funds and monthly distributions in syndicated projects with regular cash flows.  Our development projects don't offer any cash flows other than the terminal one.  

I have no idea what you mean by offers, services, or perks.  

Investors like to hear about your track record and your ability to deliver their capital back to them plus a return with minimal hassle and maximal upside.  They generally want to know about tax considerations and what fee loading there is on the front as well.