CREPN #169 – Multifamily Syndication Structure and Fees with Vinney Chopra
Multifamily Syndication Structure and Fees provide a significant opportunity to make money. Who better to ask about the numbers than the sponsor of twenty-six syndications, Vinney Chopra.
To buy a large multifamily property through syndication, it takes the coordination of several like minded investors. The General Partner, finds the deal, builds the team, and gets the commitment from the limited partners to invest in order to close the deal.
Members of the LLC
The owner of the property is the LLC entity created specifically for this property at closing. Members of this entity are the General Partner, sponsor, and the Limited Partners, investors. The range of ownership depends on the specific deal, but a split range of 20-40% for the General Partner and 80-60% for the Limited Partners is common. The specific opportunities are spelled out in the private placement memorandum. The opportunities to make money are numerous for the Limited Partners including:
- Distributions; this is from the operational cash flow. Distributions can be tied to a preferred rate of return for the LP’s. This payment can occur as frequently as monthly – quarterly. The LP and GP can participate in the excess over the LP’s preferred return on a predetermined percentage split.
- Disposition: When the property is sold, the equity gain is split between the GP and LP based on the ownership split.
- Refinance: If the market supports it, a refinance can return the investors capital before selling the property.
So what’s the reward for the General Partner? Below are the various ways to get paid as the sponsor of a syndication.
The acquisition fee ranges from 2 to 4% of the purchase price. It is the sponsor’s reward for putting the deal together and raising the funds needed to close. A good rule of thumb for the capital raise is 30-35% of the purchase price. The money raised will cover;
- Down payment 20-25% of purchase price
- Closing cost
- Annual insurance
- Annual taxes
- Syndication Fee
- Real Estate Legal Fees
- Capital Expenses deferred maintenance ( more if significant improvements needed)
- Acquisition Fee
Loan Sponsor “Enhancer” Fee
In order to borrow the funds needed to close the deal, the lender one investor guarantee the loan. This individual must have a personal net worth greater than the loan amount. The fee for this obligation ranges from a flat fee to a percentage of the General Partnership.
Asset Management Fee
Throughout the course of holding the property, the asset manager is responsible for overseeing the property manager and any repositioning of the asset if a value add plan is to be executed. A sponsor will also prepare and provide regular reports to investors on the property’s performance. The Asset Management fee is typically 1-2% of annual collected income.
Property Management Fee
If you have enough units, consider creating a property management firm. This is an excellent opportunity to serve your investors and collect a fee. Fees range from 4-10% of the total income collected depending on the size of the property. When you are the property manager, you can negotiate better deals with your suppliers for the benefit of your investors.
While operating the property, if the market supports, there may be the opportunity to refinance and return some equity to the investors. The proceeds of the refinance are paid to the investors to return their investment capital. When you can return the investors original capital and continue to pay them a quarterly distribution makes investors happy. The sponsor can charge a refinance fee, 1%, for doing the work necessary to complete the refinance.
When it’s time to sell the property, sponsor will charge 1 – 2% of the sale price. The fee is for the work required to prepare the property for sale. This includes: conduct property tours, gather the broker price opinions from four different brokers, and meet with CRE Brokers.