In this episode, Dr. Peter Kim dives into the concept of trust. When investing, it is important to come to the place where you feel you can trust who you are working with, whether it’s a company or an individual.
In private real estate deals, syndications and funds, trust is key in building a foundation for the partnership. Developing an “alignment of interest” with all parties involved in the deal.
As partnering with the right sponsor is the foundation for successful syndication, here are a few ways to make sure your sponsor’s interests are in line with yours.
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Now, let’s look at what we discussed in this episode:
- Alignment of interest.
- Business plan and exit strategy.
- Know how much the sponsor is co-investing.
- Fees outlined in the Private Placement Memorandum (PPM).
- The profit split.
- What is the bigger mission?
Here’s a breakdown of how this episode unfolds…
“Alignment of interest” is an arrangement in which all parties involved stand to benefit from one particular outcome. Ultimately, you want to be in partnership where everybody wins; there are benefits for all parties involved. You want to maximize the alignment, and then invest.
Before you consider investing in syndication, it is essential to understand your sponsor’s business plan and exit strategy, as they’re the ones actively managing an asset and making all the critical decisions.
Good questions to ask:
- What’s the expected cash flow?
- Will that be early on or later?
- Is the given strategy their core competency?
- What and where do they plan to invest?
- What is the investment duration?
The size of the co-investment a sponsor makes is possibly one of the greatest markers of alignment of interest. The more capital a sponsor invests in a deal, the higher risk they run, demonstrating their faith in the investment. How much “skin in the game” is the sponsor putting into the deal?
Good question to ask:
- How much are you investing in the deal?
As part of their compensation, a sponsor receives fees for facilitating a deal. These fees will be outlined in the Private Placement Memorandum (PPM), a contract between sponsors and investors.
Here is a list of the fees that Peter talks about:
- Acquisition Fee
- Financing or Loan Fees
- Asset Management Fee
- Disposition Fee
The profit split is a primary indicator of how a sponsor values their investors. No two syndications are alike, so the profit split will vary per the type of investment, hold period, and the risks involved. There are two types of profit-sharing: Straight Split, Preferred Return or Waterfall Structure.
When the interests of an investor and sponsor align, you build your real estate investing business that much faster and smoother. You’re able to sidestep the common pitfalls and mistakes others make.
Remember, you’re not just in the business of real estate, you’re on a bigger mission of getting your time back. And real estate investing is just a vehicle to get you there.
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