Updated: Jun 22, 2022
Ever heard of the term “apartment syndication”?
In a nutshell, an apartment syndication is a business structure formed between a general partner/sponsor and a group of passive partner investors to fund and acquire a property that holds high credibility, produce income from operations and to drive optimal financial gains through the implementation of unit upgrades.
So you may be asking yourself:
How do general partners (AKA sponsors) make money in apartment syndications?
Multifamily Is A Team Sport…
General partners are essentially the team leaders that get the job done when it comes to creating and implementing the business plan on an apartment syndication.
This can include everything from finding and underwriting deals, securing finances, negotiating, executing business plans to investor communications,
There are 4 key ways general partners can be compensated for their time and effort in an apartment syndication:
First are distributions, which is an umbrella term that consists of operations, refinancing, and the sale of the property. Depending on the written contract and how much everyone invested will determine what the split and payout will be. For instance, the profit split could be a clean 50/50 between a passive partner and the general partner, or it could be as tilted as 90/10. As long as everyone agrees, the profits can be split equally, or each person could obtain a different return based on the X/X ratio listed.
2. Percentage Ownership
Another primary way, which is also linked to the distribution point above, is making money through percentage ownership. Again, depending on how much personal investment the general partner chose to invest and how much the property refinanced or sold for will determine the outcome of this profit. An example for this one is the general partner owning 30% of the property and the passive partners owning 70% of it. The only underlying issue with this one is that it does not usually offer steady cash flow over time, but it could deliver large lump sums in the end if the value of the property rose significantly.
Next involves general partner fees. In short, there are typically a few different fees involved in an apartment syndication agreement, one of which is an acquisition fee. Almost all general partners will charge this one-time upfront fee, usually around 1-5% of the total purchase price. This profit will again be strongly determined on the potential of the property, the qualifications of the team, and the scope of the project as a whole. Why do you, as a passive partner, need to pay this? Because it covers the administrative costs and overhead of the general partner for their efforts to manage the acquisition process involving deal development, team building, marketing analysis work, securing finance, and other aspects involved to make the project a successful and seamless one. Other fees that a passive partner can expect to pay and how general partners get paid for their time include:
Asset Management Fee: An annual fee ranging from about 2-3% and is used to cover aspects within the business plan such as interior/exterior renovations. An important thing to note here is that this percentage is based on what the collected income is, meaning the lower the income, the lower the percentage will be.
Refinance Fee: A refinance fee goes to a general partner for their time involved in refinancing a property. Perhaps the value increases as time goes on, and they are able to refinance with a better interest rate and terms. Refinancing is not always applicable, but if it is, there may be a 1-3% fee collected based on the total loan amount.
Loan Guarantor Fee: This is another one-time closing fee (that a general partner may or may not ask for) which is collected to guarantee the loan. This one had a larger percentage range falling anywhere from .5% to 5% more or less, depending on the risk involved and if it is a recourse loan or not. Diving deeper into the risks, a recourse loan is red on the risk chart because it allows the lender to collect the general partner’s assets (home, car, credit cards, etc.) even after the collateral has been taken to collect the debt owed. On the other hand, a nonrecourse does not allow the lender to collect assets other than the collateral. In those circumstances, the loan guarantor fee will be lower since there is less risk on the general partner.
4. Brokerage Commissions (If Licensed A Broker in The Same State as The Property)
If a general partner happens to be a licensed real estate broker in the same state as the property they are investing in, then they could earn compensation for that area of business as well for performing brokerage activities for the syndication. For instance, they may earn a commission for purchasing the property initially and potentially a resale commission if selling the flipped property is part of the business plan.
Ready to learn more about apartment syndications?
Passive investing is one of the leading ways to obtain the advantages of owning an apartment property without having to put in the full time, commitment, and funding needed to execute the project. While apartment investing is not a get rich quick scheme, it is a hard asset that produces income.
Apartments are one of the asset classes that can accelerate the growth of your capital; and with syndications, it allows smaller investors to team up and purchase properties that would otherwise not be accessible to them. The "little guy" finally wins!
To learn more about apartments and how your money can work harder for you by investing passively in multifamily real estate, Then Book A Call Today, and we will be happy to have an initial conversation. We are looking to build a community of like-minded forward-thinking people interested in leveraging the collective power of syndications to help us co-create financial legacies through apartment investing.