The main concern that people should think about when structuring deals is that both sides should be benefiting from it. Jeff Greenberg, the CEO of Synergetic Investment Group, LLC, teaches us the core of structuring deals and the important elements associated with it. Jeff has been in the business a long time and he’s been an investor in $40 million of multifamily projects consisting of over 1,000 units. In this episode, he shares how he’s been structuring deals and why and gives his take on some examples of deal structures.
Watch the episode here:
Listen to the podcast here:
Structuring Deals To Get The Best Return On Investment with Jeff Greenberg
Our guest is Jeff Greenberg. Thanks for being on the show again, Jeff.
Thank you, Whitney. I’m happy to be here.
You probably remember Jeff’s name. He’s been on the show a couple of times in previous episode WS 229. Jeff has some great experience. He’s been in this business for a long time. He has done many deals. I’m thankful to have him back on the show to be able to share from his experience and teach us the many lessons that he’s learned. Jeff has many years of experience in management, staff supervision, development and training. He’s the CEO of Synergetic Investment Group, LLC, also known as SIG, investing in multifamily and student housing assets since 2007.
He’s been an investor in $40 million of multifamily projects consisting of over 1,000 units. SIG controls 317 student housing beds and properties in Georgia, Arizona, and Ohio. It’s under contract on two properties in Texas and Kentucky totaling 292 units. They’re focused on value add, student housing, market-rate multifamily and senior living multifamily properties. Jeff also runs two REI clubs over the past few years and is active on BiggerPockets and other forums. In his spare time, he road cycles 100 miles a week and spends time with his grandchildren. That seems like a long way, Jeff.
It’s been a struggle to keep that up lately but I thought of three or four runs.
That’s a way to keep moving. Jeff, thank you again for being on the show. Give the audience a little more about who you are.A deal structure should aim for the investor to be protected on the downside if the numbers do not come in. Click To Tweet
You’ve heard from me before but I’m out here in California and I invest across the country. We’re looking at value-add properties, both multifamily and student housing. Ask away on the questions.
I’d like to know your opinion and your take on some deal structure and how you’ve structured deals. You’ve structured them one way or the other. Maybe you could give us an example of a deal and then let’s dive into exactly how it was structured and why.
The main concern that people should think about the deal structure is that both sides are going to be benefiting from it. The passive investor coming in, typically he’s looking at it as far as is it fair to them? I feel it’s extremely important that they also look to make sure that the sponsor is going to be making some money as well if they’re doing a good job. When we look at a structure, we want the investor to be protected on the downside if the numbers don’t come in. The sponsor should also be protected on the upside but they gained benefits from a great performance. When we’re setting up a deal, we try to see what is going to be of interest to the investors. It’s also going to protect both sides and get us some cashflow if we’re doing the job that we projected that we would do. That’s important.
A lot of people want to look at what’s in it for themselves. When you’re getting on it with a new sponsor and there’s not going to be any cashflow for the sponsor or there’s not going to be much in it for the sponsor, all of a sudden, the sponsor’s got a problem. They need to keep the lights on and if there’s no money coming in. We look at a deal when we’re even looking at making an offer on the deal. We’re looking at what can we offer the investors? What kind of structure is going to allow that? The preferred return is the main thing that we will make sure that the investors are comfortable, that they will get a return prior to the sponsor getting any money. Let me go over a few of the pieces where the sponsors make their money.
Typically, the sponsor would get an acquisition fee. That acquisition fee is for all the effort that these sponsors put into, first of all, getting themselves educated and learning about this business. It’s also for finding the deal, getting the deal together and bringing the investors in. That’s an initial fee that they get and that could be anywhere from 1% to even 5% on a smaller deal of the purchase price and that they get up front at the closing. The next one they would get is a percentage of the cashflow. That percentage is going to be after a preferred return. Preferred return essentially is a return on the investor’s investment. If you were to get an 8% preferred return, you would get that prior to the syndicator receiving any funds or any cashflow. The preferred return isn’t guaranteed and it’s handled in many different ways. After the preferred return, the investor would start getting their shares of the distribution.
The third one is the profit at the sale. That profit at sale comes after the investors get all of their investment back and then the profit is split. That split could be anywhere from 80% to the investors, 20% to the sponsor. It could be 70% to the investors, 30% to the sponsor. It could be 60/40. The only time I’ve seen it at 50/50 is in development deals where there’s a lot more work involved for the sponsor. Those may be 50/50. That’s your split at the end. The one other fee, which is an ongoing fee would be the asset management fee. That could be anywhere from 1% to 3% of the revenue goes to the person that is on the sponsor’s team but is the middle man between the property manager and the sponsor’s team. You’ve got that person that is working for the next several years as that intermediary and working with the property management.
Some of the newer people come in and think, “I’m going to hire professional property management and then I can go back to sleep and do whatever.” That’s very far from true. You need somebody on your team that is keeping an eye and meeting with the property manager. In the beginning, we meet weekly with the management team. As time goes on and things are going well, you can spread that out maybe every other week, every three weeks we were doing it. My Houston property, we moved to once a month and then when we had nothing to talk about on once a month we started even doing that less. Initially, you’re doing that, you’re going to go over budget and all kinds of other things, how well things are performing. Those are the essential fees. Let’s go back to the preferred return. There are some different ways that I’ve seen people do this as well.
I want to hit that but I wanted to go back. One thing you mentioned that I liked too is the acquisition fee. I hear people get pushed back about acquisition fees and things like that. I would almost say if the investor doesn’t want you to make money then maybe they need to find another deal to invest in. What they don’t see is that all the work you’ve put in not even on this deal, but all the deals you’ve turned away time and time again, making sure that you have the best deal you can have for them to invest in.
The thing is the syndicator is bringing people together. If you look at any other type of deal where somebody is acting in that capacity, where they’re bringing people together, they’re bringing a buyer and seller together, bringing some group together, creating a company or whatever it happens to be, bringing in some synergy, they’re going to get paid for that. That’s a lot of work that they’ve done. It’s a lot of time that they’ve spent and they need to be compensated for that. They need to keep the lights on and keep things going.
We don’t want to be greedy when we are deciding what the percentage is. If you look at it on a small deal, maybe it’s going to be 5% or maybe on a bigger deal it’s going to be 1% or 2%. That way the sponsor is also compensated and can keep their business running. That’s important. The thing is a lot of times when we get into a deal, if we haven’t done a full raise, that we have to continue the raise after the closing, we don’t get that acquisition fee until all the money is in. Once the money is all in and everything is set up and things are rolling, then we can go ahead and take that fee.
I appreciate you elaborating on that. Please elaborate on the preferred return.
On the preferred return, there are people that do it in all different fashions. The preferred return, and this is not a guaranteed return, will be on the cashflow. Available and distributable cash will go to the investor until they received whatever that percentage is, let’s say it’s an 8% return. Let’s say I invested $100,000 once on an annual basis. The preferred return will give them $8,000 a year. Typically, in your first year, you may not reach that. Here is where some of the differences come in. There are some sponsors that will carry that over to the next year. Let’s say you only got $6,000, so you only got a 6% return.Getting yourself educated and learn about the business. Click To Tweet
The next year comes around, that 8% picks up that too that you didn’t get. Now, your preferred return for that year coming up is 10%. Maybe they still only received the 6%, that could be continued to be carried forward until the end when finally the property is sold. That can be a problem because if you notice, the sponsor isn’t getting anything during this time. They may be getting that money from the asset management fee. I know some people that have their own property management company. They’re getting money from there but otherwise, if you see a deal where that’s the proposal, the sponsor may not be getting any money during the whole, which is not a great thing.
The next thing is let’s say we do get that 8%. Instead of that $8,000 for example, there’s $10,000 that’s available for distribution. You give out the $8,000 which is the preferred return. I’ve seen some sponsors that will say, “That last $2,000 or that last 2%, we’re going to do whatever the split is.” Let’s say we were going to do a 70/30 split. Now we’re going to take that 2% and do a 70/30 split on that. That sponsor is not getting much money out of that either. The 70% is going to the investor and 30% going to the sponsor, that sponsor is not going to be able to pay the bills with that limited amount of money. What we do is we allow a catch-up. If it was let’s say an 80/20 split, because I will make the numbers easy, now the sponsor has gotten their 8%. They have gotten their $8,000 and there’s $2,000 more. We’re going to take that as a sponsor because that’s our catch up. That’s our 80/20 split.
The next year, let’s say there’s $12,000 to distribute. That one, we’re going to give the first 8% to the investor. We’re going to get the next 2% or the next $2,000, that catches us up on the 80/20 split. Now we’re going to do an 80/20 on whatever’s left over because now we’re at uneven scale. Typically, we will tell people that they’re going to get a preferred return or they’re going to get the split, whichever is higher. If we took that $12,000 and did a straight 80/20 split, they would get the same amount of money that they would get more than the $8,000, whatever that comes out to. It can be a little confusing. There are some people that will take that accumulation of money that they didn’t get from that preferred return and give that at the end.
I know this is a little confusing but it’s good to be clear how that preferred return is going to be used and if it’s going to be accumulated all the way and held back at the end and where you’re going to get it. I want to emphasize that it’s important to make sure that the sponsors are getting money as well. We did a deal, the first deal I get, we had an 8% preferred. We held that property because this was a small property, probably a little small to be syndicated. It was in a very stable market. There wasn’t a lot of money in there. We expected to raise rents.
This was a three-year-old property. The rent is where they probably should have been and we weren’t able to raise the rent. We weren’t able to get beyond that 8% preferred return. For a few years, we didn’t make any money. We didn’t make a dime. We didn’t have an asset management fee in there. For a few years, we ran the property without getting any money at all and we got a small profit at the end. We proved to our investors that we were dedicated and that we supported them but we weren’t being paid. We made a set of small profit at the end.
I appreciate you sharing that. That says a lot about you though as well. You kept working on that property, making sure your investors got that preferred return as promised.
A lot of people may have difficulty doing that. We weren’t living on that money so we were fine but it was extra work and it took that dedication. Other people that thought they were going to jump into this business and be making all kinds of money may not be able to afford to do that. You do want to make sure that your sponsor is making some money and they may not put the dedication to do that. Those are important key ingredients in this. I’m not sure if I missed anything on the structure but are there any other things that you want me to clarify?
You’ve covered a lot. It’s good information. I appreciate you elaborating on the structure. Is there a way that when you go into looking at a deal that helps you to know how to structure it? Is there a specific preferred return you want for investors or a specific way you want them to be paid? This deal is not going to work or maybe we structured a little differently so we meet those returns that you’re trying to receive. Is there a different way that you go into it?
We go into the deal looking at what structure or what return is going to interest our investors. On all of our deals, we’ve done 8%. I know people will get in there at 7% and 6% because the returns are harder to come by. These returns are still a lot better than most people are getting in their other investments. It’s knowing your investors and what their interests are. I had a gentleman contacted me that he had investors he wants to bring in but he said, “We were paying too much money,” that he didn’t want his investors to be spoiled. If we had a deal that fit his criteria, he would bring in 90% of the equity with his investors but it had to be at a lower return because he didn’t want them spoiled. They were happy with what they were getting and that’s what he wanted.
I was going to ask you as far as deals going forward how this has changed or is it changing? Because it is harder to find deals that work and make the numbers work, are you trying to pull that down from 8%? It seems like it’s been pretty standard but I have seen more people doing a 6% preferred return lightly. Is that something you’re considering doing as well?
We’ve been considering that and the other thing that we consider is the split. Where are we going to put the split? It’s all based on our projections of returns. I know some people now that are doing no preferred returns. There are some big sponsors. They’re doing an 80/20 split and no preferred return at all that everybody gets a split right up front. It goes all the way through. I know another friend of mine that is giving 100% of the distributions to the investors and then they’re doing a 70/30 at the back end. They’re not worried about getting any cashflow at all. They are doing an asset management fee. They’re getting that cashflow but they’re not doing any cashflow through the whole, which is interesting.
I appreciate you sharing too as far as some people not doing preferred returns but doing a split. Could you elaborate on that a little bit and maybe what’s the motivation to do it that way?If people get confused with your structure and if you have too many moving parts, they're going to say they don't quite understand it. Click To Tweet
They must know that their investors will be good with our offering. The main thing is that it works with their investors and with their projections. It’s knowing what will interest the investors. As a syndicator, without investors, we’re not working. We have to have investors to pull the deals together and if we can’t create a deal structure that the investors are interested in, we’re essentially out of business.
That’s a great point. Jeff, I feel like you’ve covered it well and you’ve elaborated on many points. I wanted to make sure we’re covered. Anything else about structuring a deal that you wanted to tell the audience or anything at all?
The thing that we didn’t talk about is something called waterfalls. It is something that I haven’t done, which I would like to do. The main thing first is I will tell you the reason for waterfalls. The preferred return protects the investor on the downside that they’re going to get returns before the sponsor does. What the waterfall does is it protects a little bit more of the sponsor on the upside where if the sponsor gets past certain hurdles, certain amounts of return, then the split can change. If I got an investor of 15% annualized return, then my split may go from an 80/20 to a 70/30. If I get them a 20% return, then it may jump to a 50/50. That way we’re getting a little bit more advantage of the upside.
Where that would have come in on my deal is I had a deal that was 60/40 or 70/30, I don’t quite remember. It’s the property I sold in Houston where my investors ended up getting a 40% annualized return. They got 120% in three years. I should have gotten a bigger piece of that but I didn’t put it in the structure when I first set it up and therefore, I had to stick with what it said in the PPM. They did very well and I did fine but I certainly could have done better with a waterfall. The reason I haven’t put a waterfall in is it’s a little more complicated and people are confused. If people get confused with your structure and if you have too many moving parts, they’re going to say, “I’m not interested,” because they don’t quite understand it. That’s the reason I wouldn’t put it in. I still probably will at some point. That’s why I didn’t in the past. I didn’t want to confuse people but that protects the sponsor. The sponsor does a fabulous job and gets a fabulous return for investors. They deserve to get a better return as well. The waterfall protects the sponsor on the upside. That’s another piece.
I appreciate you talking about how it protects the sponsor on the upside. I’ve heard of a team who, and they do no prefs like you mentioned and no waterfalls. Their reasoning is they will do a split. Their reasoning was so investors can understand it. This is the way it is across the board. I’ve gone back and forth about different ways to structure deals. I appreciate you talking about the waterfalls as well. As far as doing a split, have you ever done a deal like that where you did a split and no pref?
All of my deals have been prefs so far. The investors seem to like them. I was surprised when I heard these guys that were successful and doing with no pref. They’ve got a lot of experience. They’ve got a great track record and they’ve got a huge investor pool so they were able to pull that off.
Jeff, you’re always a great guest. I always welcome you back on the show to share from your expertise. Is there one key way that stands out to you or a way that you take care of your investors that helps you to stand out among other operators?
I try to be as transparent as possible. We’ve started doing monthly updates. We were doing quarterly meetings and we’re still doing the quarterly conference calls. We’re starting to do monthly updates to keep people informed as far as what’s going on. Anytime an investor contacts me, I try to get back to them within 24 hours to answer their questions or whatever it is they happen to need. We know that investors are our customers and we treat them like that. They’re very important to us and we want to keep them happy and keep them around.
Jeff, thank you very much. Would you share with the audience how you like to give back?
I spend a lot of time at different meetings and conferences and help people out and give back. I also do some coaching where I’m giving all my advice to people. That’s probably the main way that I give back is helping out people with advice and looking over some of their deals and stuff. That’s probably the big way that I’m doing it.
How can people learn more about you and get in touch with you?
Jeff, thank you again for your time. I always appreciate you being on the show. I appreciate the audience being with us every day. I hope you will continue to come back, grow your knowledge, grow your business and join The Real Estate Syndication Show on Facebook. Go to Life Bridge Capital and connect with me and we will talk to each of you soon.
- WS 229 – previous episode
- Synergetic Investment Group, LLC
- Jeff Greenberg on BiggerPockets
- The Real Estate Syndication Show – Facebook Group
About Jeff Greenberg
Jeff Greenberg, MBA has over forty years of experience in management, staff supervision, development and training. Jeff is the CEO of Synergetic Investment Group, LLC (SIG). Since 2007 he has been investing in multi-family and student housing assets in emerging markets. Jeff focuses on all aspects of projects including; investor relationships, staff development, business systems development, and asset management.
Jeff has been an investor $30 million multi-property projects consisting of over 800 units. SIG currently controls 317 student housing beds in properties in Georgia, Arizona, and Ohio. SIG is currently under contract on two properties on Texas and Kentucky, totaling 292 units. SIG focus’ on value add Student Housing, Market Rate MF and Senior Living MF properties.
Jeff has run 2 REI clubs over the past 13 years and is active on Biggerpockets and other forums. In his spare time, he road cycles 100 miles a week and spends time with his grandchildren.
Love the show? Subscribe, rate, review, and share!
Join the Real Estate Syndication Show Community: