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Investment Syndicates - Continued...
Continued
from page 1... So, what
should the real "business deal" be that is proposed between sponsors
of income-producing real property developments and the investors of same? In
a perfect world, the idea behind capitalism is that each and every one of us is
expected to act in our own self-interest. This known course of action
allows for an economy to evolve around the market production each of us
contributes from working in certain industries. These project promoters
need capital financing in order to create a future business income, the
sufficiency of which allows for a market return to be paid to the investors (as
a whole - often referred to as "in the aggregate") for their money
risks and the promoter who created the transaction and the resulting operating
business that is expected to be responsible for the production of future income
(again, to be split between promoter and investing public). This allows
for the "classic capitalist promise" to be created:
"...
I - the investor - will give to you - the business promoter - my money as an
investment. In exchange for me - the investor - of having given these
funds over to you - the promoter, you agree to give me the lion's share of the
near-term gains generated by the enterprise, while you shall receive the
lion's share of the long-term gains and equity generated by the business..."
This is the only
approach that can lead to a fair division of the spoils generated by the
business opportunity financed with funds from the investing public. The
syndication platform created a specialized distribution structure that
corresponds to the three (3) types of syndicates that promoters/sponsors of
commercial income-producing real property based businesses can undertake.
The division of the
economic spoils between the investors (on the one side) and the syndication
sponsor (on the other side) can now be given more due consideration. In
addition to apportioning the economic gains based upon the classic capitalist
arrangement, the apportioning of economic gains has to also recognize the
following:
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The expertise of
the sponsor that resulted in the transaction being screened and approved for
syndication; and
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The reward that
is owing to the capital financing the sponsor provided in creating the new
project that was the original at-risk capital of the enterprise; and
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The expertise and
management acumen the sponsor will cause to be provided on an ongoing basis
for the benefit of the business; and consequently, the benefit of the
syndicate investors; and
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The expertise and
production efficiency the employees of the resulting business enterprise
creates for the ongoing benefit of the sponsor, the investor syndicate and
the employees.
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Let's work these
assumptions over in order and see what can be done:
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The expertise of
the sponsor that resulted in the emergence of the proposed transaction
provides compensation opportunities for the sponsor primarily in the form of
development management fees, but also in distributions, sales loads and
related items. This means the model needs to recognize these funds
only if they are being contributed to the property and not withdrawn at
closing of escrow.
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The reward that
is owing to the capital financing the sponsor provided in creating the new
project that was the original at-risk capital of the enterprise is dealt
with by replacement at the closing of the construction financing escrow or
the closing of the permanent financing escrow - placing the sponsor in the
position of having only his/her future profits at risk.
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The reward that
is owning to the expertise and management acumen the sponsor will cause to
be provided on an ongoing basis for the benefit of the business; and
consequently, the benefit of the syndicate investors is provided for in two
(2) ways:
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Property
management contract fees consistent with market conditions.
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A share of
the distributable income of the project on an ongoing basis.
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The reward that
is owing to the expertise and production efficiency the employees of the
resulting business enterprise create for the ongoing benefit of the sponsor,
the investor syndicate and the employees must be recognized as such and
created. The syndication platform provides for this via the screening
requirements. These screening requirements include, among other
things, a direct profit-sharing opportunity that vests to the benefit of the
employees of the business (as a class with compensation being paid out to
all employees of record based upon their compensation as a percentage of
total compensation) once the second level of the distribution plan has been
achieved and equal to 25% of the distributable income the sponsor receives
from that point forward to the end of the lifetime of the business.
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The three (3) main
types of syndicates promoters and/or sponsors of retail property investment
syndicates can utilize:
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Pre-Construction
Phase Syndications.
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Construction
Phase Syndications.
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Post-Construction
Phase Syndications.
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The risks and rewards change (note the table above) to each of the
participants.
Got
questions? Talk to Rainmaker and get answers.
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Do
You Know The Secret?
When it comes to commercial real
estate development finance, it doesn't matter whether you need to raise
$5 million or $50 million, the out-of-pocket costs, advance fees and
project due diligence costs will always require the same relative
investment dollars the promoters have to fund. Do you know what
that amount is? Do you know the Secret? |
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