From the desk:Syndications: LP (Capital Provider)

Asked to source LP capital for a sponsor's next raise. What does that make me?

A sponsor I've done two small LP positions with asked if I'd introduce their next multifamily raise to people in my network. They're raising $9m of equity. They offered what they called a co-GP arrangement, 10 percent of the promote on capital I bring, plus a small piece of the acquisition fee.

My hesitation is that this sounds like I'd be getting paid transaction-based compensation for selling securities. I'm not licensed for anything. When I asked, the sponsor said their attorney structured it so I'd be a co-sponsor with real duties, sitting in on monthly asset management calls and reviewing property reports.

What I actually have: a real relationship with maybe fifteen accredited people who ask me what I'm investing in. What I don't have is any clarity on where the line is between telling a friend about a deal and being compensated for it.

The decision in front of me is whether to ask for the operating agreement and take it to my own attorney, or say no now and keep the relationship simple. Leaning toward the first but the fee split is small enough that legal review might cost more than the first deal pays.

Answer

1carlos_nunezActive

Get your own attorney. Not the sponsor's, yours, and a securities attorney specifically. Whether that structure works depends on facts about your actual role and how the rules apply to it, and that's exactly the question a licensed securities lawyer answers and a forum can't.

What I'd say about the economics while you're deciding whether to spend the money. 10 percent of the promote on $9m of equity, assume you bring $1.5m of it, assume the promote pool ends up being worth $1.8m over a 5 year hold if the deal performs. Your slice is 10 percent of the portion attributable to your capital, so somewhere around $30k, paid at exit, contingent on the deal hitting its waterfall hurdles. That's not a business. That's a tip.

And the risk isn't symmetric. If the deal goes badly, the fifteen people in your network lost money on something you brought them. You'll carry that whether or not any paperwork says you're responsible.

Read the operating agreement anyway, because reading it teaches you what a co-GP position actually looks like when you're ready to build one for real. Look at what the promote is calculated on, whether it's subject to clawback, and whether you have any obligation to fund capital calls. That last one catches people. A co-GP interest can come with an obligation, not just an upside.

2 replies

3wendy_park48CapitalPRO7

The capital call point stopped me cold. I'd assumed a co-GP slice was purely upside. Asking for the agreement.