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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 involve- ment, and overall return structure. 8) SPONSOR FEES. Syndication sponsors derive compensation from one or more of the following catego- ries. A. UPFRONT FEES. These fees are built into the amount of money raised and help compensate spon- sors 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 man- agement 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 maxi- mize 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 condi- tions. 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 com- pany/operating agreement of the LLC that outlines their percentage of ownership. Some LLCs will give mem- bers 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 disclo- sures 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: or contact us at: or 408-867-1867. PAGE 64 • 2017