The syndicator can be compensated at the end in two different ways: 1) by receiving a share of the profits when the property is sold; or 2) by receiving some of the refinancing proceeds.
Let’s consider some examples:
You purchase a well-located run-down house in foreclosure for $95,000. Using an investor’s money, you make a down payment of $15,000, assume the existing financing from the lender, and put in an additional $20,000 from your investor to improve the property. You sell the property for a net sale price of $145,000. You split the profit of $30,000 with your investor on a fifty-fifty basis. Everyone is happy. The investor made $15,000 on the $35,000 investment in a short period of time, and as the syndicator, you made $15,000.
In a second example, a syndicator purchases a $3,000,000 apartment building. The syndicator raises $810,000 for the purchase, which includes a $60,000 fee. Then the syndicator agrees to manage the property for a 5% fee for the next ten years. The property produces an8% annual return and is sold after ten years for $4,000,000. At the time of the sale, the syndicator 276 then receives 20% of the $1,000,000 profit, stipulated in the original agreement.
The syndicator was initially compensated with a $60,000 fee in the beginning, a 5% management fee in the middle, and then received $200,000 in the end. The investors are happy because they received an 8% return during the ten-year life of the investment and $800,000 when the property was sold (divided up based on the original amount of the investment). It’s a matter of negotiation between the syndicator and the investor(s) what percentage of the profit the syndicator receives when the property is sold.
As a third example, let’s say the syndicator puts a 124-unit garden complex under contract for $2,250,000 and then syndicates it to investors before closing. As part of the agreement with the investors, the syndicator agrees to take a $50,000 fee at acquisition, a 10% “free piece”, a 4% management fee, and a fee of $100,000 at the time the property is sold or refinanced. The syndicator implements improved management, and the property operates well and throws off cash flow to the investors. Over the next five years the market heats up, as interest rates have fallen and the location has become desirable.
Upon refinancing, the property appraises for $5,100,000 and the investors and the syndicator take out a refinance loan of $3,500,000. From the refinance proceeds, the syndicator returns to the investors their original investment, pays himself the $100,000 fee noted above, distributes some of the refinancing proceeds based on the percentage of ownership including the syndicator’s 10% free piece, and retains the balance for future capital needs.
Again, everyone is happy. The investors had a decent return before the refinancing and following the refinancing, they have their original investment back, plus some of the appreciation (tax free since it is from refinancing), and they still own the property. The syndicator is happy having collected $150,000 in fees, a portion of the appreciation, a management fee, and still owns 10% of the property.
A fourth possibility would compensate the syndicator totally based on the performance of the property. Let’s say the syndicator decides to develop a shopping center and guarantees investors a 12% rate of return on their investment. If the performance of the property falls under 277 the 12% level, the syndicator/developer makes up the difference. If the investment performs well, the syndicator and the investors split the profits fifty-fifty at or above the 12% level.
Some developers I know form joint ventures with other people, such as other developers or their lenders. I view this as an active partnership rather than as a syndication with passive investors.
How a syndicator structures an investment depends on the needs of that syndicator. If he or she needs an influx of money quickly, the syndicator will most likely want to focus on receiving fees in the beginning. If monthly cash flow is important, the syndicator might structure the investment for monthly cash via a management fee, interest income, an asset management fee, or a percentage of the cash flow. On the other hand, if the syndicator has visions of rainbows in the future, he or she might seek a “free piece” and a percentage of the profit at sale or refinance. As a syndicator, I tend to focus on monthly cash flow and free pieces.