Sponsor-syndicated private real estate investments can be structured in many different ways. In most private syndications, the sponsor contributes a smaller amount of the investment capital; however, the sponsor offers the investment opportunity, the time, experience, and support team needed. Although the investors will provide most of the money, their role in the project is more hands off.
Following the Numbers
Let’s look at an example of how this might look:
- Investors contribute $900,000 of equity needed to close the deal.
- The sponsor contributes $100,000 of equity needed to close the deal.
- The sponsor gets 30% of distributable cash as their “carry” incentive.
For a $10,000 distribution:
- Investors (including the sponsor) will receive $7,000.
- The sponsor will receive $3,000 for their sponsorship role.
Of the $7,000 to investors, outside investors will get $6,300 and the sponsor (in an investor capacity) will get $700, based pro rata on everyone’s invested amounts.
For example, the typical project often has the sponsor providing investors with a “preferred return,” often in the 6%-10% range, before the sponsor gets any proceeds outside of returns on their own personal invested capital and a predetermined split. Let’s say that split is 70/30. With this structure, the investors are entitled to 70% of distributable cash, and the sponsor gets 30% following let’s say an “8% preferred” return to the investors. Most syndicators still focus on transactions where the sponsor has some of its own skin in the game, meaning the investor funds will also include whatever money the sponsor contributes.
Although the structure in the previous example is sometimes preferred for its straightforward simplicity and perceived fairness to all the project participants, syndicated real estate investment opportunities can be structured in a variety of different ways. From the investors’ point of view, it is important that investments be made under a structure that keeps the interests of all parties aligned, including financing and operating interests.
Return on Investment
Your returns depend heavily on the investment strategy. A yield play will return a lower rate because it is already operating well and there is little upside other than inflation of market rents and perhaps some tweaking of expenses like water conservation. On the other hand, a value play is riskier and has the potential to return much higher rates. You may not see cash flow for 3-18 months on a value-play; however, the overall returns will be much higher. Returns also depend on the area and the ability of the sponsor to either manage the property well or hire and manage a property management company that can capitalize on all upside potential.
Typically, investors expect the cash-on-cash return (COC) to be around 6% to 8% and the internal rate of return (IRR) to be in the 12% to 20% range, depending on the perceived risk of the business plan. Return of capital in a relatively short period (i.e., 3-5 years) is also a common goal of most investors unless they are more concerned with long-term passive cash flow in which they look for a 5-10-year hold.
It’s important to know what your goals are so you can look strategically at each investment opportunity placed before you.
Jorge Abreu is the managing partner of Elevate Commercial Investment Group. He has been investing in real estate for more than 15 years, starting in single-family, small multifamily properties, and eventually working his way up to large 100+-unit multifamily properties. Before entering into large multifamily acquisitions, Abreu had wholesaled more than 200 single-family properties and fixed-and-flipped more than 150 single-family properties. He also developed and completed several new development projects, over $20 million in ground-up construction.
In addition, Abreu started and has built a construction company that brought in more than $30 million in annual revenue. He is now an active and passive full-time multifamily real estate investor. Abreu and his company Elevate currently have 6,849 doors and $500 million under management. The assets are located throughout Texas, South Carolina, Oklahoma, and South Dakota.
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