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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:
-
The expertise of
the sponsor that resulted in the transaction being screened and approved for
syndication; and
-
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
-
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
-
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.
Let's work these
assumptions over in order and see what can be done:
-
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only if they are being contributed to the property and not withdrawn at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.
-
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.
-
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:
-
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.
The three (3) main
types of syndicates promoters and/or sponsors of retail property investment
syndicates can utilize:
-
Pre-Construction
Phase Syndications.
-
Construction
Phase Syndications.
-
Post-Construction
Phase Syndications.
The risks and rewards change (note the table above) to each of the
participants.
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