This is one of the most difficult places where syndicators get burned. Many syndicators, that I see, structure their deal with a 50/50 back-end. That means that the syndicator does all the work, the investor puts up all the money, and when the property sells several years into the future, they split whatever the upside is 50/50.
Some syndicators take tiny fees along the way; but for the most part, a structure where you’re taking a large back-end but no money upfront, or little money upfront, is destined to disaster, because it’s very common that the syndicator will have a hard time getting into the long run. If the syndication that one does is just for a few friends to do a deal, then there is no harm and no foul in structuring this type of relationship. However, if the syndicator wants to get into the long run and wants to be in the business for an extended period of time, then the syndicator needs to realize cash flow throughout the life of the property. Imagine if you had one deal that was a 50/50 back-end split, but no money upfront and along the way.
That wouldn’t be so bad. However, would you be able to do the same deal for 20 properties? Certainly, you would not. Twenty Deals would require the implementation of a sophisticated property management operation, a maintenance operation, a mortgage operation, and a real estate brokerage operation.
The successful long-run syndicator will establish these programs and these business entities, and will charge the syndication for it. The syndication business is a great business, but it has to be run like a business. Therefore, all of the deals that I teach individuals how to structure have a front-end, an ongoing operations component, and a back-end participation. I always encourage the smaller back-end in exchange for more money in the front and in the middle.
Joel began his career as a CPA with the prestigious firm of Price Waterhouse. where he immersed himself in the real estate syndication business. After reviewing hundreds of partnership agreements and preparing as many tax returns, he left Price Waterhouse in 1986 to start his own syndication firm, raising several million dollars in three short years. By 1990, Joel had built a property management firm of more than 40 employees with a portfolio exceeding $100 million. Joel continues to syndicate real estate and other assets, as well as counseling other promoters on successful syndication strategies. He is also involved in film financing and invests in early stage companies and other deals. For more information about Joel Block and his upcoming seminar, visit his site at http://syndicatefast.com/