How do you make money via syndication? (Buy and hold)

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How do you make money via syndication? (Buy and hold)

Travis Doyle
Investor · New York City, NY · Member since 2015 · 19 posts · 1 vote

Hey folks--trying to setup a fund to attract some private capital and was thinking of two options to structure it.

A) we dilute our investors equity and cut ourselves some, maybe 20%

B) offer them a preferred return

It seems like most people go with option B, but how?

Let's say I am working with a 12 cap, bought for 100k, 12k in NOI with a 10% pref return, where I split profits above 10% with investors 50/50. *I am not invested at all.* How do I make money on this? Am I thinking about this correctly?

1) I pay 10,000 to the investors

2) I then pay the remainder of the profits until everyone is paid back

3) once everyone is paid back 100%, then I start my profit sharing after the 10% hurdle is reached and pay myself 1,000

The problem being is that we do not have a "liquidity event" to speak of after we purchase the home, we just hold...so as a sponsor, am I supposed to wait years down the line until everyone is paid back in full before profit sharing after the 10%?

Why would anyone do this? I would have to wait years to make 1,000 dollars off this deal.

If you have experience in this field and would love to chat, I am all ears. Just let me know!

Thanks

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Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
9y

Investors in syndications generally don't deploy capital to projects with indefinite holding periods.  The longer you use capital the smaller the pool of capital will get.  Most optimal holding periods from a ROE standpoint are 5 or fewer years.  

A typical waterfall will look like:

1.  Return capital FIRST

2.  Preferred return of X% (6-10%)

3. Some split thereafter. This can be pari passu or can involve all manner of elaborate sharing arrangements. For instance it can be a certain split until some IRR is achieved and then some other split thereafter or any other number of combinations. The more elaborate this is the harder it is to explain/sell

OR

1.  Return capital FIRST

2.  Preferred return of X%

3.  Make-up return to match X% to the promoter

4.  Then some split

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  • David Miller
    Attorney · Durham, NC · Member since 2016 · 224 posts · 126 votes
    9y
    There is return of capital and return on capital -- very different. Your proposed structure provides a return of capital before you get any "promote" fees. That is tough sledding (although I have heard some people do that). Consider doing a preferred return of X% to investors and then split the remaining profits with you getting your promote and the investors getting the remainder (perhaps via a 25/75 split - 25% to you and 75% to your investors). Both are a return on capital without any return of capital. Investors do. It mind this structure because if you are making money, they are making money above and beyond their preferred return. Give yourself the option but not the obligation to return their capital prior to a liquidity event (sale or cash-out refinance) with a minimum required hold period that allows you to (hopefully) stabilize the asset, increase NOI and build equity.
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  • Travis Doyle
    OP
    Investor · New York City, NY · Member since 2015 · 19 posts · 1 vote
    9y

    Thanks David! I guess I shouldn't be doing just buy and hold. I am just torn about how to raise capital from friends and family. Most of our deals require a decent amount of sweat equity to get a decent return. Maybe just cutting equity is a safe bet?

    Most of our investors want 10%, but we need to work pretty hard to achieve 12-15%. Which is about what we would need to give them that kind of return.

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  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    9y

    Investors in syndications generally don't deploy capital to projects with indefinite holding periods.  The longer you use capital the smaller the pool of capital will get.  Most optimal holding periods from a ROE standpoint are 5 or fewer years.  

    A typical waterfall will look like:

    1.  Return capital FIRST

    2.  Preferred return of X% (6-10%)

    3. Some split thereafter. This can be pari passu or can involve all manner of elaborate sharing arrangements. For instance it can be a certain split until some IRR is achieved and then some other split thereafter or any other number of combinations. The more elaborate this is the harder it is to explain/sell

    OR

    1.  Return capital FIRST

    2.  Preferred return of X%

    3.  Make-up return to match X% to the promoter

    4.  Then some split

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    simple charge an on going management fee this is quite common.. I worked in the 80s with a large bay area syndicator and he charged management fees on all his partnerships.. Plus he owned the management company and took a nice check from that.. they had about 3 thousand doors in the SF and Sacramento area.

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    0Reply
  • Travis Doyle
    OP
    Investor · New York City, NY · Member since 2015 · 19 posts · 1 vote
    9y
    Originally posted by @Bryan Hancock:

    Investors in syndications generally don't deploy capital to projects with indefinite holding periods.  The longer you use capital the smaller the pool of capital will get.  Most optimal holding periods from a ROE standpoint are 5 or fewer years.  

    A typical waterfall will look like:

    1.  Return capital FIRST

    2.  Preferred return of X% (6-10%)

    3. Some split thereafter. This can be pari passu or can involve all manner of elaborate sharing arrangements. For instance it can be a certain split until some IRR is achieved and then some other split thereafter or any other number of combinations. The more elaborate this is the harder it is to explain/sell

    OR

    1.  Return capital FIRST

    2.  Preferred return of X%

    3.  Make-up return to match X% to the promoter

    4.  Then some split

    So assuming I took out 100k from investors, and made 12k NOI per year, are you saying I would need to pay out 12k per year for about 7-8 years before returning the preferred return? I am super new, but are you saying to make whole the investors first before the pref? Is that the norm? I can't think that is the norm, right?

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