Syndication Payout Structure?

Question

Ordinarily a syndication is heavy ownership % on the LP side .. for example 80% LP 20% GP with or without preferred return.

My question is and I ask because I heard Podcast where Tim Bratz structures all of his deals this way:

He offers 8-12% pref with a 100% LP 0% GP split until refinance and then ownership flips.. LP 10-20% and GP 80-90%

Just want to get opinions or feedback on if you think this deal structure is more effective or does it just depend on the particular deal.

His whole belief is he does not get paid until all value has been added and he refi’s and returns 100% of investor capital back to LP’s

Charles Seaman · Answer

@Matt Nettles I'll answer your question with a question.  What are you looking to get out of the deal?

I believe that Tim keeps most of his properties as buy and hold properties and the structure that he uses is effective for doing that because he's enticing the investors to fund the upfront money, while still allowing them to stay in it and make money after returning their principal through a refinance.  So he essentially gets to reap the benefits for the long-term without using much or any of his own money (which isn't a bad thing at all).

If you're looking to sell the deal in 5 years or less (as many syndicators do), then there's likely no need to offer this structure because there's no real incentive for the GP to make sure that the deal is performing well if there's no compensation for them for part of the planned hold period.

Tj Hines · Answer

@Matt Nettles, Tim Bratz definitely has a unique model. It's definitely unconventional but it works for him. The thing is he guarantees all of the loans himself and will pay that 8-12% pref regardless if the property is not performing or not.

In most of his deals the properties are not performing right away. It gives him a HUGE incentive to perform so that he can get paid himself. This is what you call aligning the investors interest and taking good care of them regardless of how the asset performs.

After returning the member capital, 100% of it - just like you said he will then take majority of ownership in the building. If you can afford or have the power to pay out all of your investors, essentially fronting all of the money then this model is beast. He takes down assets that are usually not cash flowing from day one.

Charlotte Dunford · Answer

@Matt Nettles it entirely depends. On the latest deal I did, my LP's get 8% preferred rate of return, 70% of equity after the preferred rate is satisfied, and I, as the GP, get 30% of the equity. You can also have different trenches. If you hit 8% preferred return, it's 70/30 split. 12% preferred return, then 60/40. 18%, 50/50. And so on.

Gaspare U. · Answer

@Matt Nettles how is he doubling the value in 2 years? Perhaps I am not reading this correct. Let's say for example and using simple math:

He buys a $1mm property. Raises 300k (20% down, $100k for closing costs, legal, reserves, etc.)

Is he rehabbing this distressed property?

So in this example after 2 years the value of the property would need to be ~$1.800,000k Refinance that at 20% down. you have 360k to pay off the 300k investment and the 10% per year prefered rate. Is this the idea of the plan?

Gaspare U. · Answer

It's actually funny that I am reading this because I was thinking about something like this. So lets say in ~5 years the goal is to pay off the investors via excess cash flow above the preferred rate and a refinance. I would need to sit down and crunch some numbers to see exactly how feasible it is to basically value add 30% plus the prefered rate over 5 or so years.

Matt Nettles · Answer

@Gaspare U.

I’ve heard it on many podcasts but this was the most recent video I watched where he explains how he structures the deals.. see link below

https://youtu.be/xZsjIhV4BHA

Michael Le · Answer

It's a bit like syndicating debt and works if you can drive the value up by a lot. Most B/C deals nowadays are more light value add where you end up only truly increasing the value of the property 20-25% or so but because you leverage the deal you can get your investors a good enough return. To do a model like his you should have very heavy value add deals where you could refinance and get investors fully out after a couple of years.

Gaspare U. · Answer

I’m still thinking about it,lol. If he can in fact create that kind of value add raising capital would not be an issue. In 2 years you have 100% of your capital, with two years of earning 10% AND after that you get a piece of the LP’s 10-20% piece.

The magic is in his example: buying a property for $650k, adding 100k in rehab and have it appraise for $1mm. Refinance and pulls 800k to pay off debt and repay the investors. Going fwd the investors get a 10-20% of the cash flow and the sale.

Ola Dantis · Answer

@Matt Nettles "His whole belief is he does not get paid until all value has been added"

Typically, most syndicators still get paid an acquisition fee in the front end, and the fee can range from 1-3% of the purchase price.

Danny Randazzo · Answer

@Matt Nettles it’s important to evaluate the entire hold period and look at the IRR. As an LP you want to use irr because it includes time into the calculation. I haven’t seen too many sponsors use the splits you shared but I’d want to know what the LP irr is and equity multiple to understand what the LP return would be so it can be compared to other investment opportunities

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