Syndication Fees and Waterfalls Explained
Acquisition fees, asset management fees, preferred returns and promotes: what's typical and how they change what you take home.
Read →Short answer
A private placement memorandum (PPM) is the disclosure document for a private offering. Focus first on the risk factors, the use of proceeds, fees and compensation to the sponsor, the distribution waterfall, the business plan assumptions, and conflicts of interest. Then read the operating agreement for control rights, capital calls, transfer restrictions and how the sponsor can be removed. Have your own attorney review anything you don't understand before you sign the subscription agreement.
Key takeaways
- The PPM explains the risks; the operating agreement controls your rights.
- Fees, waterfall, capital calls and removal rights deserve the closest reading.
- Assumptions in the business plan are projections, not promises.
- Your attorney works for you; the sponsor's counsel does not.
The three documents you'll receive
| Document | Purpose | Read for |
|---|---|---|
| Private placement memorandum (PPM) | Discloses the offering, risks and terms | Risk factors, fees, use of proceeds, conflicts |
| Operating agreement (or LPA) | Governs the entity and your rights | Waterfall, voting, capital calls, transfers, removal of manager |
| Subscription agreement | Your commitment and representations | Accreditation representations, amount, wiring instructions |
Where to spend your reading time
Where to focus your PPM reviewIllustrative model
Suggested share of review time
What to look for, section by section
- Use of proceeds: how much of the raise goes to the property vs fees, reserves and closing costs.
- Compensation: every fee to the sponsor and affiliates, and when it's paid.
- Waterfall: preferred return (compounding or not, cumulative or not), catch-up, splits.
- Capital calls: whether you can be asked for more money, and what happens if you don't contribute.
- Conflicts of interest: affiliated property managers, construction companies or lenders.
- Removal of the manager: whether LPs can replace the GP, and under what vote.
Questions to ask your attorney
- Is the preferred return cumulative, and does it compound?
- Can I be diluted if I don't meet a capital call?
- What decisions require an LP vote?
- Under what conditions can the GP be removed?
- What restrictions apply if I need to sell or transfer my interest?
Ask the right questions
Open the checklist →Our 25-question sponsor checklist pairs with your PPM review.
Frequently asked questions
A private placement memorandum is the disclosure document for a private securities offering. It describes the investment, risks, fees, terms and conflicts of interest.
The PPM is a disclosure document. Your rights are primarily governed by the operating agreement (or limited partnership agreement) and the subscription agreement you sign.
There is no single section, but most investors should read the risk factors, compensation and fees, the distribution waterfall and conflicts of interest most carefully.
For a meaningful investment, yes. The sponsor's attorney represents the sponsor. An independent securities attorney can explain your rights and risks.
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Sources
This guide is educational and is not investment, tax or legal advice, or an offer to buy or sell any security.
