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A multifamily syndication is an alliance in which multiple individuals pool together their equity and resources to purchase a multifamily asset. Traditionally, multifamily syndications have two parties: the multifamily syndicator (GP) and passive investors (LPs). A multifamily syndicator may also be referred to as a deal sponsor.
The syndicator(s) is responsible for finding the multifamily opportunity, underwriting the deal, sourcing equity, arranging the financing and streamlining the transaction process until the deal closes. Once the multifamily complex has been acquired, the sponsorship team is responsible for operating the asset until sale. The passive investor’s role is to bring equity. Once the multifamily complex has been acquired the passive investors will, in most cases, collect passive income from the property and receive a return upon the sale of the asset.
Many types of real estate investments may be syndicated, but multifamily real estate is a popular choice due to the cash flow and safety of the investment. Multifamily syndications may be structured in a few different ways that will determine what kind of returns you can expect as a passive multifamily investor.
A straight split is one of the simplest multifamily splits to understand. A straight split refers to the net cash flow and profits divided up between the limited partners (passive investors) and the GPs (deal sponsor(s)).
In a straight split, the split will always favor the deals LPs. Here are some common straight splits in multifamily:
• 10% GP, 90% LP
• 20% GP, 80% LP
• 30% GP, 70% LP
• 40% GP, 60% LP
Most commonly, you will see 70/30 and 80/20 splits between the LP and GPs.
A great aspect of multifamily syndications is the win-win scenario for both passive investors and syndicators. When a property performs well, everyone will profit.
Many multifamily syndications today are structured with a preferred return, also referred to as a “pref.” A preferred return is a percentage return given to passive investors before the sponsorship team can receive a penny. You will commonly see preferred returns ranging from 6%-8% in many multifamily offerings.
Another great aspect of preferred returns is they are accrued. This means that if the sponsorship team did not meet the preferred return in year one, they must supplement the passive investors’ year two return with the previous year’s pref.
For example, if a deal is structured with an 8% preferred return, and in year one investors only received a 6% return, in year two investors are owed their 8% pref along with a 2% accrued preferred return from the first year.
Following the preferred return, the multifamily syndication will break out into a split. The structure will be outlined in your multifamily offering.
Preferred returns provide a safety net to passive investors, and allow for trust and accountability to be built with a deals sponsorship team.
A waterfall is used to describe how LPs and GPs are repaid through a share of the multifamily assets equity distributions. The waterfall structure is usually based on a type of return hurdle that must be met in order to progress to the next part of the waterfall. In multifamily syndications, there are a variety of waterfalls that can take place.
As more and more layers are added, the waterfall will become more complex. The example below is a multilayered waterfall complex based on a variety of return hurdles:
• 6% preferred return.
• Split of profits 80-20 until passive investors (LPs) receive a 10% internal rate of return (IRR).
• Then, a 70-30 split until investors have reached a 12% IRR.
• 50-50 split between passive investors and sponsors of remaining profits.
The most basic waterfall structure you will see within the multifamily space is a 6%-8% preferred return with a 70-30 split. This would mean that passive investors will receive up to an 8% preferred return, and once the preferred return has been met, the rest of the profits will be restructured 70% to LPs and 30% to GPs.
Keep in mind that all multifamily deal structures will be thoroughly outlined within the multifamily investment offering. It is important to ask questions regarding fees and splits to make sure the multifamily investment opportunity aligns with your personal investment criteria.
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