Episode 177: 9 Ways to Make Money in Syndication Fees

Announcer (00:07):

This is the Self Storage Podcast where we share the knowledge and skills from the industry’s leading investors, developers, and operators to help you launch and grow your self storage business. Your host, Scott Meyers, over the past 18 years has acquired, developed, converted and syndicated nearly 5 million square feet of self storage nationwide with the help of his incredible team@selfstorageinvesting.com, who has helped thousands of people achieve greatness in self storage.

Scott Meyers (00:44):

Hello everyone, and welcome back to the self Storage Podcast. I am your host, Scott Meyers, and today we are going to do a solo session as we’ve had a lot of discussion about well many topics. Let’s face it, the industry has changed. We’re going through a time in which we’re seeing a rise in interest rates. We’ve seen a rise in construction costs for new development and or conversions and or expansion. We’re seeing banks who are underwriting just a little bit differently. They’re lowering their LTVs. We are seeing lenders who are just have their pencils down in a state that they’re not lending right now. And we’re seeing private equity a little more difficult to get on board and jump on board with many of our projects. And so it is a different environment, it’s a little more challenging environment. And on the private equity side, when I talk with so many of our private equity syndicators and the folks that are raising private capital, including ourselves and the folks within our organization who are on the phones that are talking with our private equity partners, our limited partners, we’ve had to have some lengthier discussions.

(01:45):

We’ve had more touch points in order to get them comfortable in this environment and investing in our projects. And so one of the challenges that we have and that many of you may have as syndicators, you’re seeing this the same. I don’t know that these numbers are exact, but what I found is that it’s taking us about 40% longer to raise capital 30 to 40% longer to raise capital for some of our projects or it’s taking, or we’ve had to grow our database and bring in some new investors who have capital that they need to deploy right away. And so they’re interested and they’re making decisions a little bit sooner to invest in our projects. Our projects haven’t changed. They’re still solid. We’re underwriting the same as we always have, as we mentioned on previous podcasts as well. What has changed is that the cost of capital, some of the LTVs and some of the other moving parts within the project.

(02:34):

But in terms of how we underwrite in the actual analysis and the yield that we build into these projects, nothing has changed. And so we are still moving forward. We’re finding fantastic projects, yes, even on the development side as well as conversions. We have a conversion fund in which we are actively bringing properties in and raising capital four and moving forward with. And so along with that comes a need for the private equity in those funds. And so many of the syndicators within our organization, many of the syndicators that we talk to in our mentoring programs, folks that are learning how to raise capital and those that are in our mastermind that are seasoned equity investors, the discussions that we’ve had recently have been revolving around the types of fees that we charge our folks. And so as syndicators and so as syndicators of properties, there are fees that go along with that because generally these projects that we’re raising capital for, if it’s not an acquisition, if it’s a development opportunity or if it’s a conversion, there’s a longer runway before we begin sending out distributions.

(03:32):

And that also means cashflow for not only our investment partners but also for ourselves. And we have to keep the lights on, we have to pay our staff, we have to keep the train moving down the tracks. And the way that we do that is by earning fees and there are customary fees that are included in each project depending upon the type of project it is, whether it’s an acquisition or a development or a conversion, which are a little more advanced and requires a little more handholding and a little more work on our part. So what I wanted to do today is a breakdown, what we’ve seen in the past and then also what we’re seeing in today’s current environment with regards to the fees that a syndicator can and should take on a particular project. Because one of the challenges that we’re facing right now is that we were getting some pushback from some of our limited partners or even some of the hedge funds that are stating, well, it looks like Scott, it looks like Bill, it looks like your organization may be taking a lot of fees without actually performing yet, and we’d like to keep that lighter.

(04:28):

Today’s a little tougher environment. We’d like to keep a little more reserves in place. And so they want to have a hand in the decision making process to make sure that we’re being good stewards and that we have enough money to be able to weather the storm, if you will, and want to make sure that if we have enough money for the construction reserve and the lease up reserve, because it does take cash and the burn rate until we get the project up to the place where it is stabilized and or cashflow positive to begin with. So it is a delicate dance, if you will, to let our investors know, our investment partners, our limited partners, to state that hey, we do have to pay ourselves. And by the way, we can’t strip all fees out and you can’t ask us to strip all fees out, otherwise we’re the ones who are driving this forward.

(05:14):

If we don’t get compensated, we can’t keep the lights on. If we have to lay off staff, then we don’t achieve our goals. It takes people, it takes the heavy lifting to get it up to that place. And so we’re going to cover the nine ways to make money by syndicating or the nine fees that are involved with this syndication project. So if you’re raising capital and you have found the deal yourself, well, you’re entitled to essentially either an acquisition fee or a broker or finders fee. And so this could be separated into two. So number one, let’s focus on a brokerage or a finders fee. And so this is a fee that is paid out to somebody else, to a broker or to a wholesaler as a finder’s fee for bringing that project to you. Now, that could be anywhere from a three to 7%.

(05:55):

A typical broker’s fee is anywhere from a three to 6%, and depending upon where the market is and how much work they’d actually done, that can be negotiated in terms of a finder’s fee. For some of our wholesalers, same thing. It could be a three, four, 5% just depending upon the project. And so that is a fee that is not paid to ourselves, but is something that is part of the project that you is included in all the fees and the sources and uses in your syndication project that your limited partners are going to want to see that has been paid out. And so if you’re already paying out a broker’s off finders fees, then number two, the second way to make money by syndicating or the type of fee structure is an acquisition fee. So if there is not a broker involved, we’re seeing this range anywhere from 1% to 5%.

(06:37):

So me as the syndicator, as the sponsor, our company, we have the right to take an acquisition fee for putting it all together and getting this thing to the finish line. That includes all the cost of travel, the included cost of marketing that is built in our ongoing marketing and the staff that it takes to be able to send the marketing efforts out, whether it be mailers, phone calls in our call center, our acquisition folks, we pay them separately in this project outside of what we pay ourselves as an acquisition fee. And so that’s part of it that we bring into our company. And so for us, typically we’ve stayed at roughly 2%. We don’t want this to get too high. And you get to that place where as I mentioned, some of your limited partners, they may begin to then challenge how many fees you are taking for yourself.

(07:25):

And so what is typical in the industry is one to five that we stand the low end at around 2%. Now number three is a capital raise fee. So you as the syndicator, the sponsor, there are fees involved in putting together the capital raise. You put together the pitch deck. Part of this is putting together the entire package, the underwriting itself, the financial analysis, doing your due diligence itself, and you could lump all of this into a capital raise fee. And what that takes to put together the offering memorandum and then the efforts to send that out to our folks that are investing with us, that also includes a portion of on an ongoing basis, our portal, which is where all of the information is housed. It’s a portion of all of the materials that we may send out, whether it be online or not.

(08:13):

We have a company that puts together all of our offering memorandums very professional, it costs us a little bit of money to be able to put those together and to make sure that they’re assembled in a manner that shows our brand and displays that excellence. And so there is a fee that is involved with that as well. And so we’ve seen anywhere from a capital raise fee from ourselves internally and sometimes even partnering with other organizations that raise the capital for us of anywhere from three to 15%. And really what we’re seeing is on average is landing right in the middle of about 8% as you can see as the cost. It takes the expenses in terms of putting together a full capital raise for raising all the capital, whether it’s a million dollars, 3 million, 5 million to buy a building, a facility, a portfolio. Those are the types of percentages.

(08:58):

Now we stay somewhere right around, it’s a flat fee, but we stay trying to say somewhere right around about 3% of the capital raise. But remember, we are not registered investment advisor. And if you’re not, then you can’t tie the amount of compensation or commission or the fees associated with the capital that you raise is a direct percentage of what you bring in. And so for us, we say again, somewhere around that 3% range, but it’s a flat fee. It may be a little bit less than that, it may be a little bit more, just depends upon the project and what we’re looking at in terms of the amount of fees that we’re taking on this project anyways, people can also charge number four is a loan acquisition fee. And that means putting together all of the financials, the numbers, and presenting a package to the lender.

(09:43):

And if any of you have gone through the process of applying for a loan recently, there’s a lot of work, there’s a lot of heavy lifting and you can charge your time back to the fund. And so you can pay yourself at closing from the actual loan and the private equity that you raise to the fund itself and then get paid anywhere from 0.5, meaning a half a percent to 1% is what we’ve seen as a being typical for a loan acquisition fee. We don’t take that because again, we’d like to keep our fees very, very low because at the end of the day, we want to raise capital quickly. We want our private equity partners to say yes. And if they see that you’re beginning to fee up a project a little bit too much, then it’s really easy for them to say no again if they see that you’re feeing being a little too greedy and grabbing a whole bunch of fees without actually yet due diligence.

(10:29):

Number five, this primarily should be if you’re going to pay yourself, it should be a pass through. And the due diligence is kind of similar to the acquisition fees. I mean, you’re going to go out and you’re going to visit the site, you’re going to do your due diligence, you’re going to look at the physical aspects of the property, you’re going to gather the books and the records on the project. You’re also going to hire some third party companies inspectors to go out and take a look at the project itself. But then you’re going to assemble all that and make a decision on whether it makes sense to move forward with this project or not. That means more underwriting, more evaluation, more analysis of spending a lot of time really crunching the numbers and making sure that what you buy is essentially worth the price that you’re paying.

(11:12):

Is there anything unforeseen in terms of the deferred maintenance or any projects that are left to undone or if things are just at their useful life and there’s a whole lot of capital expenditures that need to be be undertaken as soon as you close on this project. All of that is found in due diligence as well as looking backwards in the financials to make sure that what we’re seeing is what we get at is a true accurate depiction about the rent roll and all the financials that were given to us at the time that we viewed the offering memorandum and when this project hit the market. So there’s a percentage that could be tied to this. Typically we see a flat fee and what we charge is a flat fee of about $2,000 plus travel. And if it’s anything more extensive, if there’s multiple trips that are involved that we may ask for that.

(11:54):

And this is a fee that we do typically take, and it’s a small fee, it’s $2,000 and many of our limited partners and our funds, they don’t blink an eye at a $2,000 fee for us doing the analysis on that. But if you feel that you’re still getting feed up too much, it’s an easy one to be able to take off because it is only $2,000. Now, property management, we can say that number seven, we can say that that is a fee for raising capital or doing a project on your own, and that can be anywhere from three to 10%. What it takes to typically manage a property is going to be somewhere in that maybe seven to 8% range. And so it could be a profit center, but that is just for the oversight of the management itself. Some syndicators will peel that back to look at it as just oversight, meaning it doesn’t truly represent managing the property, but it’s a more of an oversight or more of an asset management fee, which is a separate one we’ll talk about in a moment.

(12:49):

And then they have a property management company in place, and that is an expense of the operation. So many syndicators will take a property management fee if they are doing some of the management, maybe some of the marketing, and then they have a payroll, somebody on site that is handling the facility that is a true expense, not of the syndication, but a true expense of the property itself. And so property management could be a cashflow center, it could be a profit center, but for us it is nothing but a pass through. So it is shown in these sources of uses and on an ongoing basis, but since we manage internally in almost all of our projects, we don’t have third party property managers. We do it. And the reason why we brought it in-house and we built out our own property management company is so that we can reduce those fees.

(13:33):

And so we’re not paying that out to another organization who may have the opportunity to be able to charge those fees back to us and fee us up. For us to be able to have property management to in place allows us to be able to drive the expenses down and raise the income in our facilities and ultimately increase the NOI. And so we bring all of our properties, and so all the projects and the properties that we bring online, we bring to our in-house property management company. But typically three to 10%, again is what MU is a syndicator could charge. And depending upon how much of that flows through the property versus a profit center is really up to how you manage the project. So number eight is an asset management fee for the fund. And we’re seeing that fee is anywhere from one to 3%.

(14:16):

And so an asset management fee means you are managing the asset itself, driving the NOI overseeing the property management company, even if it’s our own, we have an asset manager who oversees the folks in our organization that are in charge of the property management. So the asset manager’s role is to make sure that as we raise the private equity for our projects and we set up budget in place and we show the projections of the occupancy and the increase in NOI, at a certain point, the asset manager’s job is to make sure that our property management company is held to the fire and that our property management company is held accountable for that and to make sure that we are hitting our marks. And now they assist in because those folks that are asset managers come out of our property management side of the house and they understand what it takes, what levers to pull to be able to move the needle on our projects.

(15:04):

And so they are the accountability. Those folks are responsible for the KPIs associated with the projections that are tied to each and every app project and within our fund to make sure that the fund is also reaching its full potential. And so to manage the fund and the assets that are within it and then also includes in many cases the actual funds themselves, meaning sending out, then the asset manager will then send out the communications to our limited partners sending out then making sure that the K ones are going out at the end of the year that they are getting a webinar once a quarter or once a year to be able to answer questions and to be able to manage that relationship of the limited partners that have come into our fund. So again, for all of that, a one to 3% range, we’ve tried it at 1% in order to staff appropriately didn’t make sense, and so we’re at 2%, some of our projects are at 3% if they’re more management intensive or a larger group of investors that’s involved.

(16:02):

But typically you’ll see the asset management for the fund of being roughly one to 3%. And so what we recommend is again, staying in this environment, staying low, 2% should be enough to cover your expenses and perhaps profit a little bit for the staff you have to bring on and the resources of an investor portal and then the time involved in sending out the communications and setting out the reporting and setting up those webinars for your limited partners. And then number nine, how do we make money by syndicating? Well, it’s the cashflow and the backend split because we always make it a point, and this is a good time to mention that we always have skin in the game and every single one of our projects, we’re not just getting money from the bank and we’re not just utilizing all of the capital from our private equity partners so that we are 100% no money down out of our pocket, meaning the syndicators and those that own the fund, the promoters we have cashed to every single one of the projects that we bring online.

(16:58):

And in exchange for that, the balance of the equity and the money that comes into the project is brought in by the lenders and our private equity partners. But our cashflow and the backend split comes to us as a result of putting together these projects and syndicating and getting them across the finish line. So there is a general partner and a limited partner split. There are general partner shares and limited partner shares, and we as the general partners, we get a percentage of the cashflow once it begins to cashflow and the profit on the backend because we put the deal together, we orchestrated it and we are overseeing it, we are managing it and making sure that we hit our projections and we maximize and optimize this project and we sell it at the soonest possible time to be able to get the return of capital and a return on capital back to our limited partners.

(17:44):

So in exchange for that, we’re the ones who do all this and we’ve been preparing for this for many years and having an organization now built for it. And so anywhere from 30 to 70% of the overall project comes back to the limited partner and then we take that percentage share of the cashflow and the profits. I would say in this environment that we’re in right now with a higher cost of capital, we are on the lower end, we’re on roughly 20%. So we’re usually 20% of the entire project in terms of being the GP shares of general partner shares, and we’re giving up 80% to their limited partners. But what we’re always underwriting to and what we are gearing towards is getting our limited partners the highest return possible in the marketplace that we can give that is also maybe a point or two above what we’re seeing from our competition.

(18:31):

So well, who’s our competition? Well, it’s on their syndicators in the sell storage space. And so there syndicators in the multifamily space or assisted living, anybody that raises capital and brings in private equity on behalf of someone else and then they create a return for that investor and who is doing this passively and then returns that money to them in terms of distributions on a regular basis and cashflow on a monthly or quarterly basis and then splits the profits on the backend. That’s our competition. No matter what the asset class is in this market right now, anybody who is investing in alternative assets specifically in that real estate, that’s our competition. So if our competition is on a conversion or a short-term development project, they’re offering a 19 to 20% interim rate of return. Well guess what? We want to be at a 21 to 22 to 23% internal rate of return to be able to attract more folks that are interested in taking a look at our projects.

(19:31):

And of course, that’s only as good as we can put out a number all day long, but it’s only as good as your track record and your history and track record of a performance. We have that in spades. This isn’t our first rodeo. We’ve been doing this. We’ve been in real estate for 30 years. We’ve been in self storage for 20 commercial state real estate for 25 with a history of through recessions and the pandemic over and over and over again, going full cycle on our projects of buying or developing, creating value and then exiting at a greater amount than what we had projected for our investors. So on average, our returns have been in the 20 to 24% range is what we have in terms of our projected returns on our projects. When all actuality over the course of the past 15 years, we’ve been raising now 16 years raising private equity, our returns to our investors has been over 36% internal rate of return.

(20:23):

So again, we’ve been doing this for a while, and the speed at which we raise capital is one of the keys to our success. And the key to raising capital quickly is to make sure that we under promise and overdeliver as we just mentioned, but also that we don’t fee ourselves up too much so that we are perceived by the new investor who hasn’t invested with us in the past and hasn’t been on the receiving end of those incredible returns that we have sent back to our partners, but are coming to look at us for the first time and they see that we’re offering a higher projected internal rate of return, but also that we have very low fees and we have a strong track record. Well, that’s a recipe for being able to raise capital quickly in this environment, which once again is our one and only goal.

(21:05):

So what does that mean to you? It means that you still need to pay yourself enough to keep the lights on. You have to pay yourself as a syndicator to be able to do this business unless you have some other income stream in place and it’s a strong deal and there’s a big pot at the end of the rainbow, then you may feed these down even more than what I just mentioned. But I would also strongly suggest that two things, A, you don’t sell yourself short and that you are so anxious to do a deal and you’re stripping all of your fees out to make this an attractive deal to your investors and to get the IRR up and you don’t pay yourself and you don’t eat any lunch and you’re on rice and beans for the next three to five years. It’s not the proper way to run a business.

(21:45):

And B, to that point, but also going down a different path is that many of your potential limited partners or investors are coming alongside of you once they listen to your pitch, your webinar, they look at your offering memorandum and they see your fee structure, they may beat you up a little bit and you find that you’re perhaps raising capital a little bit slowly. Well, I would strongly caution that you not fall prey and or succumbing to what your limited partners are stating that you should lower your fees because in those conversations, what I would typically say is, well, I appreciate where you’re coming from, Jim or Sally. However, it still takes a certain amount of money to be able to run the operations, to be able to pay our staff that does all the work and does all the heavy lifting to be able to produce those returns to you.

(22:32):

And if we have to reduce our fees, it means that we have to reduce staff well, or we also have to reduce the amount of money that comes back to myself or my partners, and that reduces motivation across our entire organization if we’re paid less. And so if what you or anybody else is asking for us to reduce our fees on our project or strip them out to nothing, well do you think that increases the motivation for all of us that are doing the heavy lifting on a project? Well, it does just the opposite of that, as you can imagine. And all that does is demotivate myself and or the team to be able to produce the returns if we’re not seeing any compensation for the next three to five years. And so as a matter of fact, Jim, Sally, what you want is for us to be making a decent amount of money based upon the performance of this sub project along the way, which is the fee structure that we have in place, which rewards performance, which is the way our organization operates.

(23:26):

Right on down the line, you can see the way that we compensate our folks is tied to the performance. And so the sooner that we get a project across the finish line and close, and the sooner we get the development done on it, and the sooner we open our doors and the sooner we lease it up, the more money we all make. And so that is the incentive. But if you strip out the incentive and we make no money, well then none of that happens. And so perhaps this isn’t the right investment for you at this time, but we’ll continue to put projects in front of you and if that makes sense, then we would love to have you come alongside. But we already have the operating agreement, the private placement put in place on this one. We stripped it down as much as possible without taking out any of the incentive for us to be able to perform, and we feel very confident that we’re going to be able to achieve that.

(24:06):

Again, we just love this project, but if it’s not right for you, we’d love to have you come alongside and take a look at the next one. It’s as simple as that in terms of conversation. So don’t fall prey to that because then also the last thing you want to do is then have to pay your attorney too, reduce the fees, create another operating agreement. Then you have to send that out to the folks that already have invested with you and that if you do that and you send it back out to those folks, or if you then come out with another webinar or good news email to all those that were interested, Hey, we have decided to lower our fees, so that increases the returns to you as the limited partners by a quarter of a percent or a half a percent. We’d love to have you come in now.

(24:47):

Well then what does that do? Well, then they say many times they’ll say, oh, it looks like he’s raising capital slowly. And so let’s let him twist in the wind a little bit and then I’ll send another email, have another conversation, see if we can get him to strip all their fees and then see if he gets any better. And then you have just shot yourself in the foot and not given yourself very little chance to be able to stripped all the fees out. And you’ve given yourself a very little chance to be able to raise the capital on this project because now they see that if they push back that you are going to cave and sweeten the deal for ’em. So don’t fall prey to that as well. So if you just begin to follow us, you’ll see within a TriCore and our other syndicated and private placement properties and projects that we’re putting out into the marketplace right now, we are not slowing down and there is no shortage of private equity coming into our projects because we are appropriately priced.

(25:35):

We have the appropriate returns and most importantly, the appropriate fees that are tied to our projects as well so that our limited partners can’t say no or won’t question or raise an eyebrow, and now they want to come on board with us as well. So I hope that that was helpful for all of you. You just need to continue to stay positive, go after the projects that are out there because now is the time to create wealth and to acquire and develop and convert cell storage facilities in the market that we’re in. So with that gang, it’s been an honor and a pleasure to be able to chat and share some of this with you once again, and I look forward to seeing you on the next one. Take care everyone.

Announcer (26:12):

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