In the recent past I talked about Limited Partners/LPs, but they are just one side of the deal. The General Partners, the GPs are the second side of the deal and are the people that put the opportunity together. The GP is a team of people (although it can be a single person) that manage the deal. The jobs and responsibilities on the GP team include:
- Asset Management
- Acquisition Management
- Risk Capital
- Capital Raising and Investor Relations
- Sponsor/Balance Sheet Guarantor
Many times the team is broken up into the categories above, but it does not have to be as long as each of the duties are completed. Depending on the experience of the individuals and the size of the syndication they may perform multiple tasks on the GP team. Now, of course every apartment syndication is different and the team will change. How the GPs are paid will always vary as well. Many times the LP and GP are split 70/30 respectively in the deal. Let's take a look at how each duty and responsibility is split up and how, in general they are paid for their work.
Asset Management
The asset manager is responsible for the deal the entire length of the hold. Their job is to oversee the financial side of things and stay a few steps ahead of property management. This is done by working with the property management team, scrutinizing expenses, forcing appreciation and above all, following the business plan. They have a duty to hit the projected returns for their investors/LPs and should have their investors needs as their top priority.
GP Share: 20-45%
Acquisition Management
The job of the acquisition manager is to source the deal, place it under contract, complete the due diligence and of course, close the deal. That is an oversimplification though, this job requires a lot of time spent calling, emailing and meeting with people in the industry such as brokers in order to build valuable relationships. Through this they find off market deals and source the best on market deals for their syndication team. After finding a high quality deal this is also the person that underwrites the asset and submits the offer. The next step is getting the deal under contract and to complete the due diligence. They are also responsible for securing financing either through a mortgage broker or on their own. Finally they oversee the whole closing process.
GP Share: 5-20%
Risk Capital
As the title of this person implies they are in charge of funding the riskier portion of the deal. This capital is at risk because it is used to pay for the Earnest Money Deposit (EMD) and the Due Diligence costs. These costs are due before the close of the property meaning that if the deal doesn't close this capital is lost - thus it is at "risk".
The EMD is generally 1+% of the purchase price, depending on what is agreed upon and written in the contract. If it is a deal in a hot market with lots of competition a higher EMD may be more attractive to the seller and can help secure the deal. This adds up of course, for example a 1% EMD on a $5,000,000 property would be $50,000.
Due Diligence costs will also most likely be tens of thousands, remember that we are dealing with multi-million dollar purchases here and although this may sound like a lot of money (and it is) it will all be reimbursed at the close. Costs here include interior and exterior inspections, environmental inspections, legal fees, the appraisal, the origination fee, title policy and search, attorney fees and more. If you have the money laying around this is a great place to save money by not bringing in another partner or private lender but if not this is a great way for people with extra money to earn a spot on the GP or earn interest on their money.
GP Share: 5% or pay the private lender back at closing with interest or a combination of both
Capital Raising and Investor Relations
This person must raise the money in order to purchase the asset. In order to do this they must constantly be speaking with and working with people who may be interested in investing in their opportunities. In an ideal world they have a large list of potential investors for different types of assets that come through the pipeline, with this list they secure commitments of the passive investors/limited partners and generate the capital needed in order to fund the assets purchase. Before, during and after the purchase of the asset the person in charge here should be communicating with all of the LPs. They need to let them know how the investment is going and how we are handling the asset compared to the initial business plan, the private placement memorandum/PPM.
The investor relations team could also just be one person, it generally depends on the size of the deal and their network. It is also worth noting that according to the SEC you cannot only raise money and be on the GP, you must do other work as well. That's where keeping the relationships fresh comes into play, doing this is very important to keep investors happy and get them into future deals as well. Making you and you investors money in the current deal and hopefully future deals.
GP Share: 35%
Sponsor/Balance Sheet Guarantor
This is the person or persons that sign on the dotted line for the loan. With large loans there are generally a few different qualifications that must be met in order to get the loan, these include liquidity, net worth and experience. Generally you must have liquidity equal to 10% of the principal loan balance at closing, have a net worth equal to the principal loan balance and experience with the type of loan, asset class and asset size. In an ideal situation the sponsor will cover the financial obligations and the requirements for experience.
Like with all parts of the GP, the compensation for the sponsor varies and can just be a one time fee at closing or a percentage of the GP. For riskier deals and financing the compensation will of course be higher. It is also worth noting that if it is a recourse loan (an example of a riskier loan) they will receive more than a safer non recourse loan.
GP Share: 5-20% or one time fee of 0.5-5+%
Conclusion
The General Partner side of the deal is important, they control the deal from start to finish and bring it to fruition. There could be a whole team of people performing these actions or just one person, that depends on the situation. Generally the more experience you gain the less people you bring into the GP as you learn better techniques, build out systems and a team of great professionals (broker, mortgage broker, legal, etc.). Also remember that the compensations noted all vary and can be negotiated from deal to deal. Lastly, always remember that it is the GPs job to make sure the LPs are compensated according to the business plan and that the asset thrives.