In Part 1 of Important Terms You Should Know for Real Estate Syndications We discussed Syndication, General Partner/Sponsor, Limited Partner, Investment Type, Investment Strategy, Minimum Investment, Preferred Return, and IRR. In Part 2, we continue our quest for high-level definitions of terms. As before, we call all of these “Target”, because, until the investment exits, they are just that!
Target Hold Period
The Target Hold period is the intended investment time frame for the asset. This can be anywhere from 3-5 years to 15 and more based on investment strategy. Your Sponsor would have defined the target hold period as part of the offering; however, always be prepared for a longer hold period. The Sponsor will look for a sale of the asset at the most opportune moment, and if the target hold period falls on a market downturn, it might not be the wisest path forward.
Target Equity Multiple
Target Equity Multiple is another way to represent the expected return on investment. Unlike IRR, it does not consider the notion of time, so pay attention to the hold period! Equity Multiple is calculated by dividing all projected distributions and return on capital by the initial invested amount. You will usually see this expressed as something like “2.5x”. This means that over the investment period, you will multiply your investment 2.5 times, or you will get 150% ROI. For deep dive on Equity Multiple please check out: IRR, AAR, Equity multiple, oh my!
Acquisition Fee
The Acquisition Fee is the fee paid to the Sponsor upon Purchase of the asset. This fee pays for the time and due diligence the Sponsor put into finding and securing the deal. The fee will range between 1% and 3%. Anything above that, and you should be really suspicious.
Asset Management Fee
Another Sponsor fee is an Asset Management Fee – this fee pays for the Sponsor to oversee the management of the asset. This is not to be confused with Property Management, which we cover below. This is simply the sponsor paying attention and ensuring that the asset is performing and managing the property manager. This will usually be 1%-2%.
Property Management
Every real estate asset needs “boots on the ground” management, this is true in a syndication setup as well. This is what the Property Management covers. Often this is a third-party professional property management company, although sometimes some sponsors have their own in-house property management company. Either way, this is something you will have to pay anyway and is considered part of the expenses. Property Management can range from 4%-6% for larger assets but can be higher for smaller assets.
Disposition Fee
Just like at purchase, there is usually a fee at a sale. This fee pays for the time commitment of the Sponsor in finding buyers for the Asset and going through the sale process. You will usually see this being at 1%. A lot of these fees are just the price of doing business in the real estate syndication business. The Sponsors do need to make money somehow.
Waterfall
This is not referring to the majestic natural phenomenon, this refers to how the profits (both regular distributions and return on capital distributions) are split between the Investors and the Sponsor in the real estate syndication. We will cover this topic more extensively in another article, but you will often see something like:
- The Investor gets 100% of profits up to the Preferred return (let’s take 8% as an example)
- Between 8% and 15% the split is 80% to the Investor and 20% to the Sponsor
- Above 15% the split is 60% to the Investor and 40% to the Sponsor
This is just an example this will be outlined in the offering and in the PPM. Want to learn more? You can see our deep dive on Waterfalls here: Real Estate Syndication Waterfalls Explained
Summary
We hope this information is useful, obviously, there is a lot more to cover, but if you use Wealth Syndy, you will be able to see some of these terms in action with just-in-time help and tips. So Sign up for our Newsletter today and be notified when we go live!
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