ferred returns are paid , and original investor principal is returned . The percent of profits that get split among investors can vary significantly on a deal , based on risk , sponsor involvement , and overall return structure .
8 ) SPONSOR FEES . Syndication sponsors derive compensation from one or more of the following categories .
A . UPFRONT FEES . These fees are built into the amount of money raised and help compensate sponsors for time and money invested to find and vet the deal , secure the loan and structure the syndication for the investors . There is no formal terminology , but this money is commonly called sponsor fees , acquisition fees , or due diligence fees . These are separate from 3rd party fees from entities such as lenders , attorneys , title companies , and inspectors .
B . ASSET MANAGEMENT FEES . During the hold , some sponsors will take compensation for management time and costs incurred to keep the property running successfully . These are typically a percentage of rents collected or net cash flow that the syndication receives and are paid at the same time as dividends to investors .
C . PROFIT SPLITS . Typically , most of the value of a property is derived at the time of the sale . A successful syndicator is incentivized by a percentage of net profits to help close a deal out and maximize profits . These will vary by deal , but should be high enough that the sponsor is motivated to invest the time and effort throughout the entire hold period to maximize returns .
9 ) EXIT PLAN . Syndications are illiquid and are passive investments , meaning sponsors decide how to execute the plan and when to sell the property . A good sponsor will have an exit plan that has a projected hold period or range of years , contingent on market conditions . Most value-add deals will be shorter in length due to most of the value being created in early years . Many
stabilized property deals will be longer in order to take advantage of increasing rents , equity build up through debt payoff , and stabilized cash flow .
10 ) VOTING RIGHTS . Most syndications are structured through an LLC . The LLC buys and sells the property with the sponsors being Class B managers . The Class A investors will be formally included in the company / operating agreement of the LLC that outlines their percentage of ownership . Some LLCs will give members voting rights as well , which can be used for large decisions such as changing management , restructuring returns , or dealing with death or transfer of existing members . It is important to understand the type of rights you have as an investor and what types of transferability , if any , your shares have .
This is just a sampling of the many components of a real estate syndication that savvy investors should be knowledgeable when evaluating opportunities . Knowing how syndications are set up and function will allow you to make the best investment choices .
Lastly , a good synidactor will provide a Private Placement Memorandum ( PPM ) with extensive disclosures and data to all investors , event rhough the sec only rquires it for non-accredited investors . Ask for it . v
Best regards to you and your investing ,
Tom
Wilson Investment Properties is a turnkey provider of both single family rental homes and multifamily and commercial real estate syndications . We ’ ve been providing high-quality investments for over 16 years to investors around the world . To learn more , visit us online at : www . tomwilsonproperties . com or contact us at : info @ tomwilsonproperties . com or 408-867-1867 .
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