Have you wondered how the fee structure in a syndication is broken down? There are 4 main fees associated with syndication deals, but it is also important to understand the profit sharing structure between general and limited partners. Fee structure can vary depending upon the syndicator’s track record, degree of risk, complexity of project, varying degree of value add, current market conditions and hold period. So let’s get right into it! Keep in mind, most value add apartment syndications are based on 3-5 years hold period.
The Four Most Common Fees in Syndications
- Acquisition fee: This fee is charged by syndicators & shared among general partners for work involved in putting the whole deal together and is usually 2 to 4% of the purchase price. Fee is paid to the syndicator at the time of closing the deal.
- Asset management fee: This fee is paid to general partners on a monthly basis for project managing every aspect of the property: legal, construction, renovation, accounting and operations. It can be a flat fee or range between 2-3% of property’s monthly rental collections.
- Refinance fee: This fee is paid to general partners for work involved in obtain a new or permanent loan. This may apply If the business plan involves refinancing the property to return a portion of capital back to limited partners. It can range from .5% to 1.5% of the refinanced amount.
- Disposition fee: This fee is paid to general partners for work pertaining to selling, listing, disposal of the property as well as legal and accounting responsibility pertaining to dissolving the company post sale.
Now that we have defined the common fees, let’s now talk about the profit sharing structure and what is entailed in that. The fees listed below are paid to the syndicator directly from the equity raised and profits of the deal.
Two Types of Profit sharing structures between General and Limited Partners
First, we have the Straight Split Structure
This pay-out structure splits cash flows from investment & profit from sale based on split. For example, 75/25 split would mean 75% of cash flows during the holding period would go to limited partner and remaining 20% goes to general partners. Upon sale of property, limited partner capital will be returned and remaining profit, no matter how much would be split 70% to limited partner and 30% to general partner.
Next, we have the Water Fall Structure
This pay-out structure can be quite complex as it provides preferential return to limited partners before general partners receive their share. Unless syndication returns over preferential return, GP does to participate. Splits may change if a certain return threshold is achieved thereby incentivizing general partners to outperform. Below is a typical water fall structure although it will vary from project to project.
- Up to 7% preferred return to LP, 80/20 Split
- Catch up by GP on preferred return on their share of split
- Up to 12% return 80/20 Split
- Returns over 12% are based on 65/35 Split
The fees listed above are paid to syndicator directly from the equity raised and profits of the deal. Now that we have outlined the profit sharing structure, a potential investor should read & understand the operating agreement & private placement memorandum. One tends to feel a higher degree of comfort level investing in something that we understand.
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