As investors are becoming more and more interested in larger deals, Real Estate Syndications are starting to become more and more popular. As a result, investors are creating their own syndications without realizing how complicated this can be.
The main difficulty they face when creating their own syndicate is the basic structure, especially, how the funds will be raised, how the profits will be earned, how the returns will be offered, etc.
Allow me to give you some options and ways you can approach syndication to build up a structure for fundraising, payouts, and fees.
Equity Fundraising vs. Debt
Equity fundraising and Debt financing, both of them have their own advantages and their own shortcomings.
Some of the funds use the capital they have to invest in paper assets in mortgage notes form. Others directly invest in hard real estate assets. Also, sometimes, the investors mix the 2 models. The combination of these 2 models do both and sometimes another version which combines debt or private capital with the commercial mortgage credits/loans.
Offering fixed returns
This involves offering a fixed return to the passive partners or investors. For some, this is a bit confusing but if you know how these structures work, it’ll be easier for you to understand whether it will work for you or not.
This is how it works. First, the sponsor needs to promote and make offers to the passive partners a fixed return. This means the partners are guaranteed a predetermined fixed rate of return before the sponsor can take any profit from it.
However, once the partners are paid as it was fixed, the sponsor can now take his part from the profit. Over the years, I have seen many fixed return rates and among them, 7% – 8% was the most common. And then the 75/25 splitting of profit where the sponsor gets the smaller share between the two.
In a nutshell, this structure means the partners will be given their profit at the fixed rate which they agreed with the sponsor and only then can the sponsor reap his share from the profit.
Straightforward equity split
This is a rather simple one and if you are thinking of creating a new syndicate.
The idea is simple. Split on basis of percentage ownership.
Most of the time, the majority of the profit goes to the investors and only a small percentage stays on the plate for the sponsor. Most of the time, the split is like 90/10. However, this can vary.
Say, a huge deal made $60,000 over the last quarter. So, the sponsor will get only 10% of $60,000 which is $6,000. The rest of the share, the 90% or $54,000 will be divided between the investors on the basis of how much percentage they own. Say, there are 2 partners who hold equal shares for this hypothetical deal. So, the profit (90%) will be distributed equally and each of them will get 45% of the 90% profit they made.
Before you make any decision, talk to your legal advisor who knows the SEC laws. They’ll help you make a reasonable decision.
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