Syndication Offering Structure Debate

[Scott Morongell]

Sponsors: What deal structure are you currently pitching to your LP's and why? 

Passive Investors: What is your favorite structure assuming the sponsor and market have already checked the boxes for you? And why is it your preferred structure?

Below are a few of the most common structures:

1. 7-8% pref with 70/30 split thereafter (some add waterfalls based off IRR hurdles met)

2. Class A shares at 9-10% throughout the hold with no upside (20-30% of cap stack) Class B shares (70-80% of cap stack) at 6-7% pref with 70/30 split thereafter (waterfall added with IRR hurdles met)

3. Straight split 80/20 or 85/15

4. 12-14% annualized returns with 6-7% of it being offered as a pref and then the remainder accrues until sale/refi and is made whole before the GP gets to participate in the refi/sale proceeds

*Sponsors who have switched from one structure to another, how did your investors receive it? What was the purpose for switching?

[Brian Burke]

For most value-add multifamily syndications I use structure #1.  More specifically an 8% pref followed by 70/30 to a 12% return, followed by 60/40 to a 15% return, followed by 50/50 thereafter.  Sometimes this can vary slightly depending on the deal.

For properties acquired today, anything higher than a 15% return is an outlier so hitting the 50/50 tier is harder and even if it is hit the amount rolling to that tier is relatively small.  However, the increasing promote rewards performance (or good luck).

Conversely, if the deal under-performs, investors can earn up to 100% of the profits if the 8% isn't met.  Without a preferred return, sponsors share in the first dollar of cash flow whether they perform or not.  For that reason, I don't like option 3.  Investors should be in first position to earn a return before the sponsor receives a split of the earnings.

Interestingly, in looking at a few of our deals our structure results in investors receiving between 73% and 75% of the total.