Breakdown of the Money in a Syndication/private money deal?

Question

Hey everyone,

I'm not necessarily looking to do these types of deals anytime soon, but I've been listening to the podcast from the start and keep hearing about syndication and private equity deals.

My question is: How does the money flow into and out of these deals? Are syndications fundamentally different than if I had one partner putting up most of the money?

I'm not just talking about raising money or getting paid. Does the 50% rule still work? Are you getting financing for these deals or are the equity investors the "bank"? If you have a property that is 200 units, are you still getting $200 a door? If you put together a deal, are you just getting fees and the "$100 a door" (or similar figure) goes towards paying investors a return?

I realize there are a lot of variables at play, but these are some gaps in my knowledge of the more advanced concepts. I wanted to ask because I am curious, I have no expectation of doing any deals like this any time soon.

Thanks!

Alina Trigub · Answer

@Scott Kimberly

The world of commercial real estate investing is very different from residential. To top that, there're variances from one commercial asset class to another. If you're interested in learning about multifamily investing or commercial real estate in general, I recommend you start with a few books, such as Steve Berges  "the complete guide to buying and selling apartment buildings" and Frank Galinelli "what  every investor needs to know about cash flow". This will put you in the direction.

Best!

Sam Grooms · Answer

Syndications are not measure by income per door. Instead, they are measure by return metrics. No, the 50% rule isn't used very often. Even on the smaller scale, I would only use the 50% rule as a quick tool to see if its worth underwriting further. In a particular submarket, my expenses don't change much if I'm charging $800/mo in rent or $1,200/mo. Use actual dollars when possible.

Yes, syndications use leverage. The syndication is only being used to pool money together for the required equity. As for the fees to the syndicator, they charge up front fees, fees during the hold period, and fees at the exit. These fees are "keep the lights on" fees. The real pay day for the sponsor/syndicator comes from their share of the gain on the exit (and cash flow, depending on the type of deal it is). Investors usually get 100% of the cash flow and gain on exit, until they receive a set return, say 8%. Then, the cash flows and gain get split between investors and the sponsor, say 70%/30%, respectively (common structure among multifamily value-add). This is just one example, though. There are countless ways to set it up.

Jay Chang · Answer

@Scott Kimberly Like what Greg and Sam stated, every syndication is different.

Typically the return is structured based on a percentage split and a preferred return.

Let's use the following example.

70%/30% split with 8% return for $5 mil project.

Assuming 75% LTV, the required equity is $1.25 mil.

8% return means that the investors who contributed to the $1.25 pool of equity can expect an 8% annual return. If this return is not satisfied, then this 8% carries through the next year like an unpaid debt. If the return for a specific year exceeds 8%, then the additional money is split 70% to the investor and 30% to the sponsor. As you can see, a sponsor can invest $0 and still get cash distribution if the payback exceeds the 8% return; however, this is not recommended because most investors want the sponsors to invest their own money as well.

Hope this helps. Feel free to reach out to me if you have more questions.

Greg Dickerson · Answer

@Scott Kimberly every deal is different and a lot of syndicators structure splits and payouts many different ways.

Syndication is simply pooling investor capital to invest in a deal or asset or business. You can syndicate the equity portion only and then finance the remainder of the purchase (debt portion) or you can syndicate the entire debt load. You can google the term and learn a lot from blog posts, podcasts and videos. Joe Fairless has a fantastic book and podcast on syndication as well.

There are no hard and fast rules in terms of operating costs and profit per door. Each type, class and style of apartment is different and operating costs can vary greatly depending on what part of the country you are in.

This is a very short answer to a huge topic and question but there are lots of resources out there to help you gain a much better in depth understanding of the topic.

Trevor Ewen · Answer

@Scott Kimberly

The good news is that the underwriting on larger deals tend to rely on numbers that are a bit more sound and have a longer track record (larger units are almost always operated & sold like a business, so good records are easier to produce). The bad news is that this makes yardstick measures harder to do. Cap rates are your closest to a quick evaluation of the style of unit and market, but it tells you nothing without looking into the operational numbers.

On another note: I would rather take bad numbers from a good partner than good numbers from a bad partner. In other words, I trust a good partner to do they best they can in a punishing environment. Bad partners will not produce returns, regardless. The game is one of management and stewardship, and if those systems are not in place, no projection can save you.

To start looking at the numbers, try to get your hands on some offerings. Ask questions. Some people may be willing to show you projects that completed years back. Just to give you an idea, I just found some old offering PDFs just by doing a Google Search. I would not presume they are all good, but it's worth learning how to read one and asking questions about the terms.

Scott Kimberly · Answer

Thanks @Trevor Ewen!

Scott Kimberly · Answer

Thank you all for your answers!

What would you say then is the "yardstick" one would use to evaluate a deal like that? There's a fairly easy formula for Retail, but it seems a bit more complicated, if not completely different, for syndications/commercial/large deals?

I can use the 50% rule and the 1 or 2% rules and a few other metrics for small 1-4 unit deals. What do you use for large?

Breakdown of the Money in a Syndication/private money deal?

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