Real estate syndicators, such as Stelvio Equity Group LLC, typically sell a portion of the ownership interests in their company that will own the income-producing real estate. The company the investors will buy into is most often a limited liability company (LLC) set up for the sole purpose of owning the real estate (Investor LLC).
What happens is Stelvio Equity Group LLC, acting as the manager for the Investor LLC, secures an agreement to purchase a multifamily apartment complex. Stelvio Equity Group then decides how much capital needs to be raised in order to acquire the deal and what percentage of the company shares, in this case, the Investor LLC, to sell in order to acquire the needed capital to meet the company objectives.
The funds raised for the Investor LLC become investor capital contributions. These interests usually have limited voting rights and a right to a share of the Investor LLC’s profits.
As the syndicator and manager, Stelvio Equity Group will retain ownership of the remaining interests not sold to investors in the Investor LLC. This ownership portion is referred to as carried interest. Carried interest reflects the percentage of the Investor LLC profits Stelvio Equity Group will receive as compensation for services provided or sweat equity.
After the Investor LLC (managed by Stelvio Equity Group) acquires the property, operates the property, pays operating expenses and loan payments, and sets aside reserve cash amounts, the cash left over is considered distributable cash or available cash. This distributable cash may be paid as a direct split between the investors and Stelvio Equity Group, or as a preferred return.
For example, let’s say investors contribute $1,000,000 to purchase 80% of the Investor LLC shares with a preferred return of 6%. This means the remaining 20% of shares are reserved for the syndicator. Year 1 produces a distributable profit of $80,000 (after operating expenses, loan payments, reserves). The first 6% or $60,000 ($1,000,000 x 6%) goes to the investor and the remaining $20,000 is split 80/20 with 80% going to the investors and 20% going to the deal syndicator. The aggregate return on investment for the investor in this example is 7.6% ($60,000 + $16,000).
This is just one example of how an investor makes money with private real estate syndications. There are many more options available for splitting distributable cash flow with equity investors so it’s very important that you understand exactly how the deal is structured. There is no right or wrong approach to how a syndicator structures deals, you just need to understand what they are presenting to you as the investor.
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