So many questions as to how a syndication works and where is all the capital spent, but our focus today is going to be some of the ways syndicators make money….
Syndication is seen as a business and those who participate in syndicating a deal are spending their time and efforts to ensure this business is running smoothly and that the investors are receiving the projected returns based on performance of the property. In many cases, General Partners in a syndication will also participate in the deal by putting in capital as investors.
Below are 4 simple ways a syndicator can make money on a particular deal:
Acquisition Fee
As part of a successful close on a syndication, the general partner (team) will collect what’s known as an Acquisition Fee. Many syndicators collect anywhere from 1-3% (some times more) of the purchase price depending on a number of variables within a deal. This fee is collected for sourcing the deal, running due diligence and seeing the deal from initiation to close. This is a one-time fee that’s paid to the syndicator as part of closing.
For example, if the purchase price of a syndication is $1,000,000 and the syndicator decides to collect a 3% acquisition fee, their fee at closing would amount to $30,000.
Investors should look for this percentage on the offering memorandum and know exactly how much the syndicator is collecting as part of the deal.
Asset Management Fee
Once the transaction of the asset is complete, the real work can begin. On the operation side, the management team will step in to manage the tenants in the property and on the execution side, the construction team will begin planning and executing the renovation plans, if any.
During this time, the general partner team will transition into ensuring a smooth operation of the property and for doing so they usually collect an Asset Management Fee. These fees are ongoing while the property is under their management and is normally a percentage of the rents collected.
As an example, if the total amount of rents collected is $25,000 a month and the asset management fee is 2% then the AM fee would be $500 per month.
Equity/Profit Split
As part of a syndication the deal structure will determine who will get paid and how much based on splits between General Partners and Limited Partners.
There are many ways a deal can be structured, but the simplest form would be a predetermined split for the partners on the deal. A simple example is where the General Partner team takes 30% of the profits where the Limited Partners will take 70%.
Disposition Fee
A syndicator is also able to be compensated for overseeing and managing the sale of the property once the holding period is over. The fee includes analyzing the market data and ensuring that the exit strategy will maximize the investors’ returns as much as possible.
This fee is usually between 1-2% of the final sale price and will be paid to the general partner team at closing. Similar to acquisition fee, this is a one time fee for the work the operator/GP team will take on to ensure the property sale is smooth and that all investors are paid accordingly.
Summary
As you can see there are a few simple ways for a typical syndicator to make money from a deal. One thing that’s worth noting is that the fees and splits are a direct reflection of the work it takes to acquire, operate and sell the property through its life cycle. It is no easy task to manage various teams within this business to ensure investor returns are maximized.
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Sam Khairi
Afto Capital
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