On the other hand, acquisition fees can be enormous on large deals and can drive some deal sponsors to be short-sighted and focus on closing deals rather than operating deals profitably.
Think about it, a $10m deal with 2 point acquisition fee is $200,000. You can see how some sponsors will lose track of buying good deals and focus on just closing deals, regardless of how good they are.
He said he likes to have an 8% preferred return for the majority of his 450 door portfolio.
It “gives some certainty to investors about their overall returns.
This generally ranges from 1-3% of gross rent revenue.
Do The Ends Justify The Means Essay - Real Estate Syndication Business Plan
This may or may not go to the deal sponsor and it goes to cover the cost of managing the asset and management team that was hired.Plus, 8% also happens to beat the historical stock market return of 7%.” The waterfall refers to the overall distribution of funds and tiers that were mentioned above, but it is often referred to as how profits are split after the preferred return is met.Andrew Campbell explains it perfectly: Profits generated above any preferred returns are generally split between investors (Limited Partners) and deal sponsors (General Partners).The general idea is that the higher the returns are to investors, the more the sponsors make, and everyone is happy.The downside of multiple waterfalls is that sponsors can sometimes be incentivized to return investor capital early (to boost the IRR) and trigger these waterfalls.According to Mark Kenney over at Think Multifamily, a preferred return is “a return that investors received BEFORE the general partners receive a return.” In essence, after the investors receive their initial capital back, they received a preferred rate of return before the general partners get any payout at all.Mark, an investor and real estate coach who owns over 2,000 doors in Tennessee, Georgia, and Texas, says that he doesn’t like to use a preferred return but has in the past on deals that didn’t expect any distributions for 12 or 18 months.But, deals that compensate the sponsor more will create more incentive to produce high returns.That’s why there are so many different ways to structure deals!There are a lot of competing interests in a deal and it’s difficult to align everyone 100% of the time – that’s why trust must be built with anyone that you’re investing with.But, a few major points to consider are how all the fees and the preferred return and waterfall all fit together.