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Real Estate Syndication Deal Structures [what they mean for investors] - YouTube
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if you're a passive investor it's
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important to examine the structure of a
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real estate syndication to make sure
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that it aligns with your investing goals
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before you invest
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hey guys i'm kenny wolf ceo and founder
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of wolf investments
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i've created a full-time income from
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real estate investing which has led to
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financial freedom and living life on my
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own terms
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i've created this channel to pass on
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that information to see how you can
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transform
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your life through real estate if you're
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new to the channel make sure you
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subscribe and check out our other videos
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alright guys so today let's look at the
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deal structures that are floating out
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there for real estate syndication
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today we're going to break down what the
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returns look like for each
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what investor need to know about each
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type of deal structure and
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how to pick the right deal structure
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that fits your investing goals
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all right so first question is what do
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we mean by deal structure
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deal structure is the split of profits
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between you
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and the other impassioned investors and
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what the general partners are going to
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take the general partners to the folks
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that are leading the charge
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on this investment all right so question
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number two
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who are the characters involved in a
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real estate syndication
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so you've got the limited partners or
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the passive investors
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those are the folks that invest in the
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deal they have very
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limited day-to-day operations decisions
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it's really tough to have 30 people
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decide what the exterior paint color
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should be on the building
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you know things like that so typically
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they are
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folks that invest in the deal own a
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percentage of the newly created entity
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and then make um kind of higher level
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uh decisions when they vote on capital
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bigger capital transactions like a
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refinance
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a sale uh things like that so okay now
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we've got our passwords now who's
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actually driving the ship right so these
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are going to be
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you're either they're either called a
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general partner a syndicator a deal
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sponsor
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um those are the folks that are driving
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the ship
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and really pushing the performance of
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the asset
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to meet or exceed the projections they
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gave to the
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passive investors they are the folks
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typically they also sign on the loan
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they guarantee loans
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um they oversee the management company
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may oversee the rehab so there's a lot
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of roles that that deal sponsored place
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all right so why are all these uh deals
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structured so differently
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um there's a really great quote floating
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out there it says uh
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real estate syndications are like
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snowflakes uh there's no two that are
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exactly the same and they're very
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correct on that
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so why so why are they structured so
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differently it's going to come down to
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two things guys
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the first thing is you may have a
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syndication that's more focused on
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appreciation
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so big equity gains not much cash flow
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um
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that deal probably needs to be um carved
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up differently
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than a property you're just buying for
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steady stable cash flow
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based off those profit splits and then
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the second would be it's just the
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philosophy of each
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deal sponsor syndicator is very
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different on on how they carve that up
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so it comes down to those two things but
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again you want to make sure those align
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with you
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and your investment goals and the
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investment goal of that particular asset
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as well
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all right guys so deal structure number
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one that we're going to go over today
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is typically one that you'll see it's
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probably the most widely used out there
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for syndicators on real estate
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transactions so
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but really incentivizes for a really
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quick turnaround on your investment
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and we'll go over that right now so
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usually there's three parts to this type
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of deal structure
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you got the acquisition fee you got the
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preferred return
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and you have the waterfall again this is
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a little bit confusing so we'll go
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go over it and uh ask me any questions
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in the comment section below we can
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expound on a future video
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so typically acquisition fees this is
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paid at closing when you acquire the
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asset the this indicator sometimes gets
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a
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one two two
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one to two percent um acquisition fee
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again that's paid at closing they're
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getting a pretty big payday right there
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um further turn typically you're gonna
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see you know six to eight percent
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[Music]
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and then a waterfall these are kind of
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where it gets really kind of tricky guys
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so
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hang in with hang there and hang in
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there with me so
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you know typically you'll have the prep
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and then up and up to
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and then past 15 percent ir
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15 ir r
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maybe it goes to a 70 30 split
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you know between six and then
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then between 16 and 20 percent irr
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that goes to a
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65 65 35 split
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and again and then 21
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plus irr it's going to be go go to a 60
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40 split
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so what does all that mean on the
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waterfalls well let's back up let's talk
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about the preferred term that means
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that if the property cash is cash
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flowing nine percent a year
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um to investors that means that the
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first six to eight percent
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of that nine um nine percent leaving
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one to three percent to the um deal
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sponsor
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um paid up this is battles with
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investors first investors get paid the
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cash flow first on this model
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but again you're leaving very minimal
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cash flow to the deal sponsor so are
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they going to be incentivized to hold
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that long term
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probably not so waterfall how does that
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work this is another big payday for the
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deal sponsor
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and and also for the passive investors
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as well so
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but you'll see either calculate all this
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off the
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internal internal rate of return look
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that up sometime it's a big mathematical
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equation
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but basically if you're 15 or higher the
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profits are going to
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please split 70 30 70
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going to the past investors
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the profits above 15 so between 16 and
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20 percent
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are going to be split 65 35 65 going to
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the passive investors
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and then the profits above 21 percent
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irr
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are usually split 60 40 sometimes you'll
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see 50 50. so
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that's the um that's the very quick
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version of what this kind of deal
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structure looks like
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again if you look at it from the
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syndicator's point of view
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and you need to as a passive investor
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because you're incentivizing them to
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perform
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and they should get paid for their
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performance but you want to make sure
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that's the right way a right way to
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incentivize them for your
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your investing goals with this asset so
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again they're getting paid at closing
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for buying the property
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not paid very much during the whole
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period and then
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incentivized and paid a lot along with
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the passive investors
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on the waterfall so again that's on the
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sale of the asset
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so make sure you are always aligned with
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your do sponsor
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all right guys so deal structure number
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two is how we do it up here at wolf
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investments
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for our multi-family investments our
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we typically do a slightly different
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steel structure for our
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triple net double net commercial
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properties and also our development as
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well
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because again guys you got to have make
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sure you're always aligned and
[449]
incentivize
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the both the investors the investment
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goals
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and the syndicator that's driving the
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ship in that
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particular type of real estate
[459]
investment so again
[460]
this is for multi-family we tweaked it a
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little bit for the different
[464]
offerings that we have up here but in
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the uh
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it's all in the vein of making sure
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we're fully aligned with our investors
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all the time
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so what does that look like for our
[474]
typical multi-family teal structure
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we what we do up here
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so typically what we do up here is
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either an 80 20 or a 70 30 straight
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split so that means that the
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you know cash level on the asset is
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split 80 20
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or 73 depending on the on the deal
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again it's all about deal structure what
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is the risk level
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what is the amount of work involved in
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turning that asset around
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um so really that's it guys so it's a
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straight 80 20 or 70 30 split
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that's on cash flow the refinance
[513]
proceeds
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and then on a sale investors have to get
[517]
100
[518]
of their initial equity back um before
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uh through a through the refinance and
[524]
or the sale of the property
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before that 80 20 or 70 30 split kicks
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in
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that's really important guys on on on
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how you
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read that read that document from the
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other syndicators make sure they're
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doing it right but
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80 20 or 70 30 on those three things and
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then
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the only other thing we charge in our
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multi-family assets is a 1.5 percent
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asset management fee and that is because
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these multi-family assets are so
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hands-on uh that it takes some manpower
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up here with investments to
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do those correctly so that's it guys all
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right guys so deal structure number
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three
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is kind of everything it could be
[560]
anything or it could be a hybrid between
[561]
the first deal structure we went over
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which is the kind of fee model preferred
[566]
return waterfalls
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and then our model here is the 80 20
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split you might see
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some kind of of a fee up front but no
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prep
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or a higher prep it just really depends
[577]
on on the deal structure guys for that
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deal so
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something that we do up here a little
[581]
bit differently on ours
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for i guess i'll show a kind of a hybrid
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option is
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on our development deals to so again
[589]
there's no acquisition fee but
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um those development deals there those
[593]
are recourse loans
[595]
so there's a loan guarantor fee
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we do a prep during the development
[600]
stage so as we're putting that
[602]
project together we're developing it
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building it out of the ground or
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redeveloping an asset
[607]
there's a six prep maybe a seven prep
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depending on the deal
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that's baked in there and then once we
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go to do our first cash flow
[616]
distribution once the property is
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stabilized and leased up
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then it goes to a straight you know 70
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30
[623]
maybe 80 20 split but that way
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again we're incentivizing people both
[628]
the past investors
[630]
and the syndicator every step of the way
[633]
development's a little bit different so
[635]
you have to structure the deal a little
[636]
bit different as well
[637]
on the flip side on our commercial
[640]
properties that
[641]
that we do up here the triple net double
[643]
net assets that we buy and underneath
[644]
the fund
[646]
those we just do a straight 80 20 split
[648]
no asset management fee because again
[650]
once we
[651]
acquire that asset it's very low
[654]
management on our side
[655]
post close with that asset class so
[660]
in summary guys make sure you're fully
[662]
aligned with your
[663]
syndicator that's also fully aligned
[666]
with you
[667]
based off the investment goals for that
[670]
for that syndication that you're
[672]
investing in all right so question
[674]
number five
[675]
is what are the types of fees that are
[677]
typical in a real estate syndication and
[680]
as we
[680]
said earlier there is no kind of typical
[683]
real estate syndication
[684]
um there's some you know overarching
[688]
themes that you'll see but typically
[690]
you'll see
[691]
some kind of fees baked into the
[694]
syndication
[696]
and again it depends on the type of real
[699]
estate deal that's being put together
[700]
it's also going to depend it's also
[703]
going to depend on the philosophy of
[705]
that
[705]
deal sponsor that you're dealing with so
[708]
sometimes you're going to see an upfront
[709]
acquisition fee
[711]
usually that's one to two percent out
[713]
there in the market
[715]
you know you also see a loan guarantee
[718]
fee
[718]
if it's a recourse loan it's probably
[720]
warranted they're putting their name and
[721]
their credit
[722]
and everything on the line um usually
[724]
you'll see that to
[725]
a half a point to maybe a point of the
[728]
of the
[728]
loan amount um you typically do see an
[732]
asset management fee that's basically
[734]
every single one
[735]
especially for the multi-family real
[737]
estate syndicators out there
[739]
those deals are very hands-on and so
[743]
that point and a half is of the monthly
[745]
collected revenue
[746]
at the um on the asset um and then
[749]
sometimes you're going to see
[750]
an exit fee usually you get this point
[753]
uh a point maybe half a point
[755]
but again guys it varies so differently
[757]
based on
[758]
each deal and each syndicator as well so
[761]
make sure you do your homework on and
[762]
make sure those align with
[763]
you guys all right question number six
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is how does wolf investment structure
[768]
its syndication deals
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compared to others out there in the
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marketplace so wolf investments does not
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do enough for an acquisition fee
[776]
um we don't do a pref so we just do a
[778]
straight 80 20 or 70 30 split
[781]
depending on the projection returns of
[783]
that investment
[784]
so why do we do it that way um one we
[787]
focus on typically longer term
[789]
hold real estate projects um and and by
[792]
setting up that structure we're always
[794]
aligned with our investors we have to
[796]
sing for our supper
[798]
we don't get paid at the closing table
[800]
on day one
[801]
um if the property does well everybody
[803]
does well in our deals
[805]
um if the party does underperforms then
[808]
it's under performance for everybody so
[810]
that way we're fully aligned with our
[812]
investors at all times
[814]
now other guys this is probably 90
[816]
percent of the folks out there
[817]
syndicators out there
[818]
they set their deals up with an
[820]
acquisition fee
[821]
a preferred return to investor to
[823]
passive investors
[825]
and then waterfalls which is just
[828]
gobbledygook on how they split up the
[829]
remainder of the profit
[832]
so again guys you want to make sure that
[835]
the how you incentivize your deal
[837]
sponsor aligns with your investment
[839]
goals and
[840]
more importantly probably on a specific
[842]
level is the investment goals of
[844]
that real piece of real estate that the
[846]
group is is setting up to buy
[849]
because if you are a long-term real
[851]
estate investor
[852]
and that's what we focus on if you're
[854]
one of those the worst way you can
[856]
incentivize someone is to pay them
[858]
enough for an acquisition fee
[860]
um and do a preferred return to passive
[862]
investors and then have waterfalls
[865]
because you're incentivizing by said
[867]
doing that setup you're incentivizing
[869]
the deal the deal sponsor or syndicator
[872]
uh to have a big payday
[874]
when y'all buy the buy the asset day
[875]
number one um the syndicator is not paid
[878]
very much at all
[879]
during that preferred return that hold
[881]
period um and then they're paid
[883]
a big payday when they sell the assets
[885]
so if you're a long-term invest real
[887]
estate investor
[888]
that's the worst way to incentivize the
[890]
gun because think about it
[891]
this indicator is going to be
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incentivized to um to buy an asset
[896]
good or not uh um and then have that
[899]
preferred return
[900]
um number or that that period um as
[903]
short as possible
[904]
um and then move to the waterfalls which
[907]
has to happen
[907]
to sell the property so um it may be a
[910]
good way to incentivize that syndicator
[912]
if it's a very quick hold if your
[914]
property if your goal is to go in
[916]
do your do a value add component to that
[918]
real estate
[919]
and then get out very quickly in two
[921]
three years but again if your longer
[923]
term hold
[924]
it's a horrible way to incentivize them
[927]
question number seven
[928]
how do you tell what the deal structure
[930]
is in that
[931]
big packet of information you just got
[933]
from this indicator where you find it
[935]
right
[936]
so typically that is going to be in the
[939]
investment summary
[940]
somebody would call it the member oh the
[941]
om office memorandum
[943]
there's a whole bunch of different words
[944]
for it but there should be a packet and
[946]
there be
[947]
usually it has a whole bunch of
[948]
beautiful pictures but it's a
[950]
it's summarized it's supposed to
[951]
summarize the investment so not only
[953]
just the asset what the business plan is
[955]
who are the who are the team on the gp
[958]
side
[959]
who's involved on that and should also
[961]
go over the deal structure how the
[962]
profits are split
[964]
in the deal if it does not go into that
[967]
or into enough detail make sure you read
[968]
the operating agreement or the ppm
[971]
the private placement memorandum it
[973]
should definitely spell it out there
[975]
guys make sure you read both of those
[977]
documents
[979]
and ask questions if you have any on how
[982]
the profits
[983]
and what you vote on really guys make
[986]
sure you read that document because i've
[987]
seen passive investors regret not
[989]
reading
[989]
the full document and just signing it so
[991]
don't do that
[993]
so how do you tell if a deal sponsor is
[996]
fully aligned with this
[997]
investment that you're about to put
[999]
money into right usually it's big money
[1001]
so you really want to make sure they're
[1002]
fully aligned with you so
[1003]
again we kind of covered it briefly
[1005]
before but we'll go a little bit more
[1007]
detail
[1008]
you've got to make sure that you know
[1010]
that their
[1011]
the deal sponsor compensation um is
[1013]
aligned with the investment goal of that
[1016]
particular asset
[1017]
so if it's a longer term hold you know
[1019]
maybe the upfront acquisition fee
[1021]
preferred return to investors and
[1023]
waterfalls
[1024]
does not make sense on how to and how to
[1026]
incentivize a deal sponsor
[1028]
on that asset if it's a charger hold
[1030]
that
[1031]
that might be a good one the
[1034]
if it's a longer term hold again if you
[1036]
want to
[1037]
it's more based off the performance of
[1039]
that asset over a long period of time so
[1041]
you want to
[1042]
you know incentivize them more on the
[1044]
cash flow
[1045]
the refinance and the sale as opposed to
[1048]
just buying the asset right
[1049]
so guys what you think of the video if
[1052]
you liked it or didn't like it
[1054]
put your comments in the comment section
[1056]
below let us know how we did
[1058]
if we can approve it let us know how to
[1059]
do that as well or topics that you want
[1061]
to
[1061]
for us to cover throw them in there too
[1064]
if you're new to the channel make sure
[1065]
you subscribe
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hit the bell for notifications when new
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videos are posted we do put out a new
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every thursday at noon central so make
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sure to check those out
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thanks for watching
[1081]
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[1083]
you
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