How to Structure the GP Compensation for Apartment Syndications
Last Updated: 7-22-19
The two main parties in an apartment syndication are the general partners (GPs) and limited partners (LPs). Essentially, the LPs fund the deal and the GPs manage the deal and each party is compensated accordingly – the most common compensation structure is an 8% preferred return to the LP and a 70/30 profit split of the remaining profits to the LP and GP respectively.
In regards to the GP, if all of the duties are performed by one person, then that individual would receive 100% of the compensation allotted to the GP. However, it is unlikely that the GP will be a single person, especially one the first few deals. Instead, the GP responsibilities will be fulfilled by two or more individuals.
When that is the case, how do you determine how much money each individual makes? Like most things in apartment syndications, it depends because every deal is different. There are, however, general guidelines for how to create a compensation structure for the GP.
Basically, the GP is broken into five parts. Each part has certain duties, as well as an assigned percent ownership of the GP. All of these percentages are negotiable, but here are the general guidelines:
1 – Due Diligence Costs
The time between signing the purchase sales agreement and closing the deal is known as the due diligence phase. During the due diligence phase, certain costs are incurred by the GP. These include the earnest deposit, legal fees to create various contracts, inspection costs and appraisal costs. Most of these expenses are due before reaching the closing table.
Since you are dealing with multimillion-dollar deals, these due diligence costs will likely be in the tens of thousands of dollars. If you can personally pay for these upfront costs, great. Front the costs and reimburse yourself at close. If you cannot, then you will need to bring on a third-party to cover these costs.
In return, you will need to compensate this person. There are a few approaches. You could borrow the money from a family member or friend and sign a personal guarantee, promising to pay them back at close. Another option is to ask one of your passive investors to front the cost. In return, you can offer to pay them back at closing with interest. Or, you can offer them a percentage of the general partnership.
For the latter approach, expect to give up 5% of the general partnership to the person who fronts the due diligence costs.
Eventually, you will be able to cover these costs yourself (or between you and your partner).
2 – Acquisition Management
Another collection of duties performed by the GP is acquisition management. The acquisitions manager is responsible for finding deals. They generate off-market leads and build relationships with brokers to source on-market deals. Once a deal is located, they are responsible for underwriting the deal and submitting offers on qualified deals. After the deal is under contract, they will manage the entire due diligence process, secure financing from the lender and oversee the closing process.
In return, the acquisition manager will generally receive 20% of the GP.
3 – Sponsor
The sponsor is the individual or individuals who sign on the loan. This person may also be referred to as the loan guarantor.
Usually, first-time apartment syndicators will not have the liquidity, net worth or experience requirements to qualify for a loan. So, they must find an experience apartment syndicator as well as someone with a net worth equal to the principal loan balance and liquidity equal to 10% of the principal loan balance at closing. Ideally, the sponsor covers the experience and financial requirements.
The compensation offered to the sponsor varies from deal-to-deal. Typically, they are either offered a one-time fee at closing or an ongoing percentage of the GP. The one-time fee can be as low as 0.5% to 1% and as high as 3.5% to 5% of the principal balance of the loan paid at closing. The ongoing percentage of the GP can range from 5% to 20% or higher.
The riskier the deal and the riskier the financing, the higher the compensation. For example, the sponsor of a distressed apartment community will receive more compensation compared to a turnkey apartment community. And the sponsor who signs on a recourse loan will receive more compensation compared to a nonrecourse loan.
4 – Investor Relations
Another GP duty is investor relations. Investor relation responsibilities include generating interest from passive investors prior to finding a deal, securing commitments for the passive investors in order to fund the equity investment and ongoing communication with the passive investors while the business plan is executed.
Generally, 35% of the GP is allotted to investor relations. On some deals, 100% of the equity investment is raised by a single individual. In other cases, multiple people raise money for the deal. For the latter, make sure that this individual or these individuals are doing other activities and can justify their percent ownership of the GP based on those other activities. The money raising should be a byproduct and not what they are being compensated for. Technically, according to Rule 3(a)4(1), if someone is only raising capital, they are not considered a GP.
5 – Asset Management
Lastly, the GP is responsible for the ongoing asset management of the deal after close. They ensure that the property management company is implementing the business plan, which includes conducting weekly performance reviews with the site manager, frequently visiting the property, analyzing the market and the competition and addressing any issues that arise.
Generally, the asset manager receives 20% to 35% of the GP.
Again, these are the general compensation numbers for the five parts of the GP. But everything is negotiable and will vary from deal-to-deal.
One person might perform all of these duties, a handful of people might perform all of these duties or multiple people might perform one of the duties (i.e. multiple people raising money, sponsoring the deal, finding deals, etc.). Usually, on the first few deals, there will be multiple people on the GP. But, as you complete more and more deals, you will need to bring less and less people onto the GP. But when you are starting out, you should do whatever it takes to complete a deal, even if that means giving up a majority stake in the GP.
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