Paying a syndication sponsor's (high) travel costs
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votesOriginally posted by @Brian Burke:
$200K to $300K is insanely high. A clue here is it says "Travel and Inspection Costs / Due Diligence." So could this possibly include third-party reports, lender inspections, lender's travel costs (yes, lenders bill the borrowers), and so on? And would this be for multiple properties in a fund? I can see maybe $50K or so per property for all of that stuff, including lender thirds, survey, zoning reports, etc. But for sponsor travel? No way! I budget around $15K for DD related travel and we usually don't come close to spending all of it, meaning any remaining balance goes to cash reserves or offsets another line item that goes over budget (it happens!).
you know all those pics of successful syndicators sitting in private jets :) someone is paying for those.. or maybe its just fluff.. ? along with lambo pulled up next to said Jet.. :)
32 Replies
- Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes6y
Originally posted by @Andrey Y.:
This is something I frequently see when reviewing opportunities:
Travel and inspection costs / Asset due diligence $200K $300K etc.
Now, if the entity is purchasing 1 or 2 assets, how much does travel, hotels, etc. cost? There is nothing to stop the syndication sponsor from traveling first class, staying at the Plaza 5* hotels, and eating lobster and champagne every meal. If there is a huge cushion in the budget, why not? I don't blame them. Its human nature. I probably would too.
When I think about it, I want my GP in a sense to get great accommodations and be as comfortable as possible. I'm a doctor and I definitely don't travel first class most of the time. This makes me think I am in the wrong business! There is so much lee way for a sponsor to do whatever they want, human nature will come into play. There is no one auditing their actions. And the budget is very generous for these things.
A high number isn't a big deal if the LLC is raising $50MM. If its a $10M property, I'm not so sure. That said, I am considering to change careers ;)
I have not seen anything like this. Are you sure you’re looking at travel costs and not acquisition fees? Travel and due diligence is separate and usually only around $20k or so for a $10 million deal.
- 6yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
$200K to $300K is insanely high. A clue here is it says "Travel and Inspection Costs / Due Diligence." So could this possibly include third-party reports, lender inspections, lender's travel costs (yes, lenders bill the borrowers), and so on? And would this be for multiple properties in a fund? I can see maybe $50K or so per property for all of that stuff, including lender thirds, survey, zoning reports, etc. But for sponsor travel? No way! I budget around $15K for DD related travel and we usually don't come close to spending all of it, meaning any remaining balance goes to cash reserves or offsets another line item that goes over budget (it happens!).
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes6y
Originally posted by @Greg Dickerson:
Originally posted by @Andrey Y.:
This is something I frequently see when reviewing opportunities:
Travel and inspection costs / Asset due diligence $200K $300K etc.
Now, if the entity is purchasing 1 or 2 assets, how much does travel, hotels, etc. cost? There is nothing to stop the syndication sponsor from traveling first class, staying at the Plaza 5* hotels, and eating lobster and champagne every meal. If there is a huge cushion in the budget, why not? I don't blame them. Its human nature. I probably would too.
When I think about it, I want my GP in a sense to get great accommodations and be as comfortable as possible. I'm a doctor and I definitely don't travel first class most of the time. This makes me think I am in the wrong business! There is so much lee way for a sponsor to do whatever they want, human nature will come into play. There is no one auditing their actions. And the budget is very generous for these things.
A high number isn't a big deal if the LLC is raising $50MM. If its a $10M property, I'm not so sure. That said, I am considering to change careers ;)
I have not seen anything like this. Are you sure you’re looking at travel costs and not acquisition fees? Travel and due diligence is separate and usually only around $20k or so for a $10 million deal.
I will copy/paste directly from the PPM of this anonymous offering.
Asset Due Diligence: Travel and inspection costs ................................................... $ 250,000
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes6y
Originally posted by @Brian Burke:
$200K to $300K is insanely high. A clue here is it says "Travel and Inspection Costs / Due Diligence." So could this possibly include third-party reports, lender inspections, lender's travel costs (yes, lenders bill the borrowers), and so on? And would this be for multiple properties in a fund? I can see maybe $50K or so per property for all of that stuff, including lender thirds, survey, zoning reports, etc. But for sponsor travel? No way! I budget around $15K for DD related travel and we usually don't come close to spending all of it, meaning any remaining balance goes to cash reserves or offsets another line item that goes over budget (it happens!).
See line item directly from offering docs above. Its not even multiple properties or one property. I believe the fund buys performing and non-performing notes, where the LP gets a fixed return and thats that. And the fund isn't that huge. General admin costs are another $100K. Thoughts?
- 6yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
Well, on the surface that sounds high, but without visibility behind the scenes it's not fair for me to judge. Perhaps a good place to start is by asking the sponsor for a breakdown of exactly what those line items are intended to cover, and an explanation/dialogue surrounding that issue to see if it all makes sense. I suppose if they were buying hundreds of notes and had to get appraisals on each property, or had to send someone to get eyes on the properties or something similar those costs could add up. But I'd really want to know more from the sponsor before investing in that.
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes6y
Originally posted by @Brian Burke:
Well, on the surface that sounds high, but without visibility behind the scenes it's not fair for me to judge. Perhaps a good place to start is by asking the sponsor for a breakdown of exactly what those line items are intended to cover, and an explanation/dialogue surrounding that issue to see if it all makes sense. I suppose if they were buying hundreds of notes and had to get appraisals on each property, or had to send someone to get eyes on the properties or something similar those costs could add up. But I'd really want to know more from the sponsor before investing in that.
Roger that. I sent you a PM with the line by line item. I'm a bit uncomfortable asking about these travel and admin costs and such, but I guess it has to be done. Normally, I don't pay much attention to DD, legal, etc. stuff on an offering, but based on the general sense I got from you guys (~$20K per $10M), something seemed off.
- Rental Property Investor · Fremont, CA · Member since 2017 · 125 posts · 75 votes6y
@Audrey I have a few multifamily assets in Dallas that I manage remotely from California. My partner and I travel quite frequently (about once a month) to check on the property and work with the property management company. However we don't charge any of these travel expense to the property/investors. We get paid a standard asset management fee and to me this is part of the sponsor's own expense.
I was a passive investor myself and structure my deals on how I would want to be treated as a passive. If a syndication group is charging 2-300k to remotely manage a property, then I might as well go with a syndication group that's local and get higher returns, no? - Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes6y
Agreed with @Brian Burke, ask for a breakdown of those costs and what it covers. On its face it seems very excessive.
- Investor · Johns Creek, GA · Member since 2017 · 463 posts · 488 votes6y
I am a sponsor of mobile home park deals. Regardless of the asset type, here's how the syndication business works. The acquisition fee, cash flow split, and whatever that goes into the pocket of the GP is the cost of the product you are purchasing from the GP. That product is money - the return you are getting on your investment. You definitely want your GP to be 100% transparent about where your money is going. However, if you were getting the returns you want, it wouldn't matter if the GP is eating lobsters or fast food. If you pay $800 for an iphone, would you care how Apple shareholders are spending it? It's the same thing in the syndication business. It's the end results that count - your returns.
- Rental Property Investor · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes6y
Originally posted by @Charlotte Dunford:
I am a sponsor of mobile home park deals. Regardless of the asset type, here's how the syndication business works. The acquisition fee, cash flow split, and whatever that goes into the pocket of the GP is the cost of the product you are purchasing from the GP. That product is money - the return you are getting on your investment. You definitely want your GP to be 100% transparent about where your money is going. However, if you were getting the returns you want, it wouldn't matter if the GP is eating lobsters or fast food. If you pay $800 for an iphone, would you care how Apple shareholders are spending it? It's the same thing in the syndication business. It's the end results that count - your returns.
There is an ample amount of research (dating back decades) into this topic and it all points in one direction - costs matter!
I have to agree with @Andrey Y. initial reaction at balking at these costs. As @Brian Burke mentioned, one should dig deeper and not go off first impression only but at the end of the day it DOES matter (by a lot) what the sponsor is doing, how they are conducting themselves and, most importantly, how they are spending the funds entrusted to them. This goes to the core of how this or any other commercial transaction transpires ie the sponsor should act as a fiduciary and is not living the high life off investor funds.
Or in simpler words, it is doubtful that the average sponsor (again, deeper research needs to be done) would be eating lobster if this was their own money.
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes6y
Originally posted by @Omar Khan:
Originally posted by @Charlotte Dunford:
I am a sponsor of mobile home park deals. Regardless of the asset type, here's how the syndication business works. The acquisition fee, cash flow split, and whatever that goes into the pocket of the GP is the cost of the product you are purchasing from the GP. That product is money - the return you are getting on your investment. You definitely want your GP to be 100% transparent about where your money is going. However, if you were getting the returns you want, it wouldn't matter if the GP is eating lobsters or fast food. If you pay $800 for an iphone, would you care how Apple shareholders are spending it? It's the same thing in the syndication business. It's the end results that count - your returns.
There is an ample amount of research (dating back decades) into this topic and it all points in one direction - costs matter!
I have to agree with @Andrey Y. initial reaction at balking at these costs. As @Brian Burke mentioned, one should dig deeper and not go off first impression only but at the end of the day it DOES matter (by a lot) what the sponsor is doing, how they are conducting themselves and, most importantly, how they are spending the funds entrusted to them. This goes to the core of how this or any other commercial transaction transpires ie the sponsor should act as a fiduciary and is not living the high life off investor funds.
Or in simpler words, it is doubtful that the average sponsor (again, deeper research needs to be done) would be eating lobster if this was their own money.
Well, this certainly is the opposite viewpoint to what Jingwen said above. I'm not sure so far how I feel about it.
- Rental Property Investor · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes6y
Originally posted by @Andrey Y.:
Originally posted by @Omar Khan:
Originally posted by @Charlotte Dunford:
I am a sponsor of mobile home park deals. Regardless of the asset type, here's how the syndication business works. The acquisition fee, cash flow split, and whatever that goes into the pocket of the GP is the cost of the product you are purchasing from the GP. That product is money - the return you are getting on your investment. You definitely want your GP to be 100% transparent about where your money is going. However, if you were getting the returns you want, it wouldn't matter if the GP is eating lobsters or fast food. If you pay $800 for an iphone, would you care how Apple shareholders are spending it? It's the same thing in the syndication business. It's the end results that count - your returns.
There is an ample amount of research (dating back decades) into this topic and it all points in one direction - costs matter!
I have to agree with @Andrey Y. initial reaction at balking at these costs. As @Brian Burke mentioned, one should dig deeper and not go off first impression only but at the end of the day it DOES matter (by a lot) what the sponsor is doing, how they are conducting themselves and, most importantly, how they are spending the funds entrusted to them. This goes to the core of how this or any other commercial transaction transpires ie the sponsor should act as a fiduciary and is not living the high life off investor funds.
Or in simpler words, it is doubtful that the average sponsor (again, deeper research needs to be done) would be eating lobster if this was their own money.
Well, this certainly is the opposite viewpoint to what Jingwen said above. I'm not sure so far how I feel about it.
All financial research done points to the same conclusion - costs matter. At the end of the day, costs come directly out of the investors pockets. You should read the old book: Where are the customers' yachts? It's written from the perspective of a stockbroker/investing in stocks/bonds but the exact principles apply.
Also, I am assuming you work hard for your money. If after research you feel the sponsor is doing something that you would feel (somewhat) dubious in nature, then run for the hills. Just because a sponsor is hitting their numbers does not justify bad behavior.
- 6yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Brian Burke:
$200K to $300K is insanely high. A clue here is it says "Travel and Inspection Costs / Due Diligence." So could this possibly include third-party reports, lender inspections, lender's travel costs (yes, lenders bill the borrowers), and so on? And would this be for multiple properties in a fund? I can see maybe $50K or so per property for all of that stuff, including lender thirds, survey, zoning reports, etc. But for sponsor travel? No way! I budget around $15K for DD related travel and we usually don't come close to spending all of it, meaning any remaining balance goes to cash reserves or offsets another line item that goes over budget (it happens!).
you know all those pics of successful syndicators sitting in private jets :) someone is paying for those.. or maybe its just fluff.. ? along with lambo pulled up next to said Jet.. :)
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes6y
Originally posted by @Jay Hinrichs:
Originally posted by @Brian Burke:
$200K to $300K is insanely high. A clue here is it says "Travel and Inspection Costs / Due Diligence." So could this possibly include third-party reports, lender inspections, lender's travel costs (yes, lenders bill the borrowers), and so on? And would this be for multiple properties in a fund? I can see maybe $50K or so per property for all of that stuff, including lender thirds, survey, zoning reports, etc. But for sponsor travel? No way! I budget around $15K for DD related travel and we usually don't come close to spending all of it, meaning any remaining balance goes to cash reserves or offsets another line item that goes over budget (it happens!).
you know all those pics of successful syndicators sitting in private jets :) someone is paying for those.. or maybe its just fluff.. ? along with lambo pulled up next to said Jet.. :)
Hahah.. exactly. I don't think I'll ever achieve the private jet status. Rather work 30 hours per week and sleep 9 hours a day. I haven't found anything I'm passionate about enough to work 60-80 weeks for 10 years for. So I'll have to stick to commercial air :P
Lack of money can definitely make a human miserable. Conversely, abundance of money (by itself) will never make a human happy.
What about the lumber business? Will that enable me to stand next to a private jet in 20-30 years?
- Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes6y
Obviously we don't have the full details of a deal you're referring to. There might be reasons for higher costs (perhaps lumping multiple costs together or something like that) or there might not be.
As others said, there's one way to find that out AND ... report back to this forum. The response itself will give you an indication whether it is an operator you want to invest in.
Looking forward to hear back from you.
- Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes6y
Very abnormal, especially for a $10m deal.
But it really depends on the developer. At the end of the day, it all depends on the track record. There are a few syndicators/developers I know that charge some insane numbers. But those are huge players in the game. They have an insane track record with successes (and failures) that you read about in papers.
Also, I bet there are no doctors that are making the money that the top developers/syndicators are making (maybe Doctor Oz? Lol). It’s a lot harder to become them. We’re talking about people whose net worths are $50m+. But even than, look at some of the top doctors at HSS. Some of their comp packages are insane compared to their peers.
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes6y
Originally posted by @Omar Khan:
Originally posted by @Andrey Y.:
Originally posted by @Omar Khan:
Originally posted by @Charlotte Dunford:
I am a sponsor of mobile home park deals. Regardless of the asset type, here's how the syndication business works. The acquisition fee, cash flow split, and whatever that goes into the pocket of the GP is the cost of the product you are purchasing from the GP. That product is money - the return you are getting on your investment. You definitely want your GP to be 100% transparent about where your money is going. However, if you were getting the returns you want, it wouldn't matter if the GP is eating lobsters or fast food. If you pay $800 for an iphone, would you care how Apple shareholders are spending it? It's the same thing in the syndication business. It's the end results that count - your returns.
There is an ample amount of research (dating back decades) into this topic and it all points in one direction - costs matter!
I have to agree with @Andrey Y. initial reaction at balking at these costs. As @Brian Burke mentioned, one should dig deeper and not go off first impression only but at the end of the day it DOES matter (by a lot) what the sponsor is doing, how they are conducting themselves and, most importantly, how they are spending the funds entrusted to them. This goes to the core of how this or any other commercial transaction transpires ie the sponsor should act as a fiduciary and is not living the high life off investor funds.
Or in simpler words, it is doubtful that the average sponsor (again, deeper research needs to be done) would be eating lobster if this was their own money.
Well, this certainly is the opposite viewpoint to what Jingwen said above. I'm not sure so far how I feel about it.
All financial research done points to the same conclusion - costs matter. At the end of the day, costs come directly out of the investors pockets. You should read the old book: Where are the customers' yachts? It's written from the perspective of a stockbroker/investing in stocks/bonds but the exact principles apply.
Also, I am assuming you work hard for your money. If after research you feel the sponsor is doing something that you would feel (somewhat) dubious in nature, then run for the hills. Just because a sponsor is hitting their numbers does not justify bad behavior.
Interesting. Will have to give this some more thought. Thanks for the book recommendation!
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes6y
Originally posted by @Alina Trigub:
Obviously we don't have the full details of a deal you're referring to. There might be reasons for higher costs (perhaps lumping multiple costs together or something like that) or there might not be.
As others said, there's one way to find that out AND ... report back to this forum. The response itself will give you an indication whether it is an operator you want to invest in.
Looking forward to hear back from you.
Will do, and will report back once I hear something.
Of note, I have done one deal with this firm which went full cycle (fund to exit in < 2 yrs) which returned a >30% IRR to me. However, this is a new deal with a totally different investment thesis and asset classes.
- New to Real Estate · Dallas TX · Member since 2018 · 43 posts · 23 votes6y
@Andrey Y.
We Sponsor Multifamily deals from 100-400 units and the fee structure is very specific and transparent. It must be a win-win situation for the sponsor and the equity investor.
The Sponsors first goal is to preserve and grow the investors Capital. Yes, there are a few bad apples out there that bank off of high fees. But most of us are focused on investor returns and executing the business plan so we can do more deals.
Sponsors don’t get rich off of fees- they get rich by doing great deals, getting solid returns, and growing their investors wealth and their own on the backend of the deal.
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes6y
Originally posted by @Account Closed:
My grandfather was a giant Syndicator of RE. He said its a great way to the Riches of Babylon, for the syndicates of Operators. He said the investors are being fleeced, not in those words.
He said look at Wall Street hedge funds. Ask yourself who are the billionaires? Surely not the investors.
Not one Hedge fund manager will invest in another HF as an investor.
He also said anytime you join a pool of money gathered by an operator...... Watch Out you are being plucked one feather at a time. Sure you make 7 per cent in $10,000. You happy. See what the Big Kahuna rakes in.
The pitch goes I'm Ben let's Syndicate together. The investor thinks Ben is on his side. He is in a way but actually the deal is so heavily skewed Ben's way no legit investor will invest. Only those who 🐝 live in the Tooth Fairy. Ben's services are not FREE.
Okay who is your grandfather? Name of company? So far all I have is someone named Greta with no profile pic.
I don't necessarily disagree with what you are saying. Do you mean to say that no one has become a multi-millionaire investing as an LP in syndications? No one has ever achieved enough cash flow that they no longer need to work by investing as an LP in syndications?
Because, I beg to differ on this. I know there are people who have. Please provide details and clarification of your post.
- Rental Property Investor · Charlotte NC · Member since 2019 · 306 posts · 183 votes6y
Originally posted by @Andrey Y.:
This is something I frequently see when reviewing opportunities:
Travel and inspection costs / Asset due diligence $200K $300K etc.
Now, if the entity is purchasing 1 or 2 assets, how much does travel, hotels, etc. cost? There is nothing to stop the syndication sponsor from traveling first class, staying at the Plaza 5* hotels, and eating lobster and champagne every meal. If there is a huge cushion in the budget, why not? I don't blame them. Its human nature. I probably would too.
When I think about it, I want my GP in a sense to get great accommodations and be as comfortable as possible. I'm a doctor and I definitely don't travel first class most of the time. This makes me think I am in the wrong business! There is so much lee way for a sponsor to do whatever they want, human nature will come into play. There is no one auditing their actions. And the budget is very generous for these things.
A high number isn't a big deal if the LLC is raising $50MM. If its a $10M property, I'm not so sure. That said, I am considering to change careers ;)
Are they chartering a plane too? That is crazy in my opinion. That's why an operator should live in the city. They can't say anything crazy like $200k-350k.
I have seen $20k-40k for due diligence and inspection fee.
I can maybe understand when you have a $100+ deal.
- Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes6y
Originally posted by @Account Closed:
Of course a Sponsor has to be competant. But the idea is to make money off the investers. The money is made off the Raise.
What happens if there's a call of Capital n the investor say No ? Is he cut loose... 😂?
Actually that’s totally wrong for any good syndicator/operator/developer. Do you really think the 2-4% AM fee, DD charge, and acquisition fee makes anyone rich? It basically keeps the lights on. The promote is what makes them rich.
The promote is why they do what they do. Without the promote it’s more lucrative to go into other businesses.
- Rental Property Investor · Dallas, TX · Member since 2019 · 88 posts · 55 votes6y
@Jingwen Dunford How long have you been in the mobile home park business? I think read in one of your replies that you bought one in Georgia with owner financing?
- Investor · Front Royal, VA · Member since 2013 · 586 posts · 418 votes6y
@Andrey Y. let us know what the sponsor says. I'd be curious. For reference, my travel (before the deal closes) is usually limited to a couple thousand on the high end. For due diligence, I budget somewhere around $100/ unit for inspections and then a certain percentage to do the file audit.
I would imagine that there is a reasonable (in their mind) explanation for their costs, but who knows? I doubt they are using it for nefarious purposes like @Jay Hinrichs insinuating, but i've been wrong before.
That's the beauty of being an informed investor though, if you don't like the offering move on. No one is forcing you to invest.
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