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Passive investors who participate in real estate syndication investments have a pretty clear picture of what a syndicator does. After all, they’re witnessing first-hand how their lead investor selected the property and the market ran the numbers to determine if it was a good deal and how they get a lender to fund the project.
And once the deal is finalized there is more work to be done, as syndications not only negotiate the deal and get financing, but also manage the property until they sell it.
That all adds up to a lot of hard work! generally speaking, syndicators are compensated in two ways: equity split and fees. As a lead investor, the syndicator also participates in the income of the real estate investment, along with everyone else that is involved in the deal.
That could include two main sources of income: rental income, and appreciation if the property is held long enough to appreciate in value.
Equity Split
Equity split means that the income that the property produces is split between the syndicator, who is the General Partner, and the investors, who are the Limited Partners. A common equity split is 30%-70% or 20%-80% (where the Limited Partners receive the larger equity stake).
Additionally, each syndicator has an equity split from the proceeds of the sale of the property. It can either be the same as the equity split of the property income, or higher. It’s not uncommon to see syndications with a 30%-70% equity split from the income, plus a 50% of the sale proceeds.
Another equity split format is a waterfall, where syndicators receive higher percentage of the equity if they manage to provide certain returns to investors. For example: 30% equity if the investment yields 15% IRR to investors and 40% equity if they get 16% IRR. This way, the syndicator is incentivizing to maximize the returns on the investment for passive investors.
Syndication Fees
In addition to equity split, syndicators are been compensated for their effort by charging syndication fees. In this article I will discuss only the most common ones.
Transaction Fees
Multifamily investments don’t happen overnight. in fact, syndicators often spend anywhere from 3 to 6-months (and sometimes even longer) in order to find the right deal. This is especially true in what are considered “hot” real estate markets, where buyers are willing to overpay for investments.
The syndicator’s transaction fees are usually 1% to 3% of the transaction’s value. This will compensate them for months of hard work. They also have operating costs involved in finding and acquiring the property, like travel, hotels, paying salaries to their employees, etc.
Asset Management Fees
While some syndicators will personally manage the property after the deal is completed, most bring in a professional property management company to handle the day-to-day management. They do this for a variety of reasons.
First, the property management company has extensive knowledge of the market. They know vacancy rates, rent structures and where to find quality tenants. Second, they are equipped to handle the day-to-day operations of the property. That includes collecting rents, handling operational problems or repairs with the units or the property and having competent subcontractors available to fix the problems when they occur.
Finally, they work to manage tenant turnover. Nothing hurts cash flow on a syndication deal like empty apartments, so the property management company works to keep all units rented.
The syndicator receives compensation for finding the property management company, contracting with them and managing them. That includes reviewing operational budgets to ensure that fees and charges are in line with other property management companies in the market.
Syndicators meet with property management companies on a regular basis, often weekly or monthly, to ensure that the property is being managed properly. If the property is scheduled for renovation ore repositioning, the syndicator oversees the construction and ensures that costs are kept in line and that all work is completed as scheduled.
In addition to managing the property management company, the syndicator also manages the investment syndicate. That means that he or she communicates with all passive investors on a regular basis about how the investment is performing. The syndicator also works to ensure that investors are receiving their compensation on a scheduled basis based on their original agreement.
Asset management fees are usually 1% to 2% of the effective income, and are paid on a quarterly or yearly basis. If the passive investors in the property were promised preferred returns, the syndicator will collect the asset management fee only after the passive investor receives the preferred return.
Disposition Fee
Most investors in a real estate syndication earn income from two sources: rental income and property appreciation. Many real estate syndications hold the property for a period of 3-5 years or longer and then sell it. That is when the appreciation portion of the income is realized.
The syndicator is compensated for managing the sale process. This includes performing a market analysis, working with a broker to sell the property and overseeing the actual sale. Compensation, or the disposition fee for this work is usually 1-2% of the actual sale price.
As discussed earlier, investors earn money on syndication deals from both rental income and property appreciation. So how long should the syndicator hold the property? There’s no clear answer. But the syndicator strives to deliver optimal financial results to his or her investors, and may hold a property longer or get out of it sooner if the financials point to good reasons to do that.
There is often a proposed holding period stated when the buy and hold investment is presented to investors, but that can change based on a variety of factors. Those factors include real estate market fluctuations, changes in population trends, construction costs - the list goes on and on. However, it’s anticipated that over time property investments will increase in value, which makes these properties a good foundation of long-term wealth creation.
Summary
Syndicators and investors can receive equity split from the property’s income and sale proceeds, and the syndicator earns fees for their knowledge, experience and hard work. The most common fees are Transaction Fee, Asset Management Fee and Disposition Fee – for each stage of the property life cycle; from finding the deal and negotiating it, through managing the property and finally selling it.
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About the author
Ellie is the founder of Blue Lake Capital, a real estate company specializes is multifamily investing throughout the United States. She is also the host of a weekly podcast called "That REllie Happened?! Unbelievable Real Estate Stories with Ellie", a podcast that brings the true stories behind the deals, from the most successful real estate investors around the globe. Ellie started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100,000,000. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations. She holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital at www.bluelake-capital.com and learn more about Ellie at www.ellieperlman.com