What is the typical deal structure of a multifamily syndication?
Let me qualify what kind of deals we are going to talk about here: non-institutional, private investor value-add syndicated deals with the deal size less than $50mm. Institutionally financed deals are a totally different ball game and we are not going to focus on such deals in this article. Instead, we will talk about deals which are financed by a group of say 20-50 (the range is arbitrary) investors each investing $50-$200K in a deal.
First, let’s learn some important terminology:
Passive investors, who don’t do much apart from vetting the syndicator and the deal, writing a check and collecting the distributions are known as limited partners or LPs.
Those investors who sourced the deal, underwrote a deal, negotiated the purchase agreement, secured a loan, developed a business plan and will be overseeing all aspects of the deal management for the years to come are called general partners or GPs. They are also often called “sponsors” or “syndicators”. Usually, there are several GPs on each deal.
GPs are compensated by the fees they get in the syndication. What are those fees?
Promote: this is the most substantial part of the compensation in a deal. Promote is simply a share of profits that GPs get in a deal above some pre-determined return threshold (which could be 0). We have seen the promote range from 10% to 40%, but the most deals fall into 20%-30% range. Some deals have LPs receive preferred return (usually 6%-8%) which has to be paid first, before the GP entity receives any distributions. “Tiered” structures (or “IRR hurdles”) are also popular – when Promote/Profit Split changes after LPs receive a certain level of pre-determined returns. For instance, the GP/LP split is 30%/70% but once LP investors’ IRR reaches 15%, the split changes to 50%/50%.
Acquisition Fee: this is an upfront fee paid to the sponsor team for bringing the investment opportunity to investors. The range is 1%-5% of the total purchase price, with the most commonly occurring number being 2%.
Asset Management Fee: this is a fee charged for managing a deal during the life of the investment. Sponsors must stay highly engaged in the deal – travel to the property, oversee renovations, keep in constant contact with the property manager. This fee is designed as a compensation for managing the asset. Usually, it is 1% or 2% of gross collected income.
Refinancing fee: This fee is usually 0.5% to 2% of the total loan amount and is paid for the work required to refinance a property.
Disposition fee: Typically 0.5%-2% of the sales price. We don’t see it very often, but did come across a few offerings that included it.
Investment Returns for passive investors are usually presented net of all fees and the target returns nowadays are ~6-8% a year (this return is called cash-on-cash, and sometimes annual ROI (return on investment)) and 14%+ IRR total. Most investors in multifamily deals want to see 80%+ total return over the course of five years (typical underwriting period).
As always, feel free to reach out with any questions you might have!