Sources of Lower Cost LP Equity?
Anyone have recommendations for lower cost equity sources for core+ and light value-add industrial? Equity checks would be on the smaller side at $2 - 10MM a deal but the goal would be a programmatic relationship. Have a handful of nice flex deals lined up in the Central and SW Florida area.
I'm thinking family offices and insurance companies would be a good fit.
If you have deals in an opportunity zone bring it to OZ funds, they're in it for the tax benefit so some might have friendlier terms
Join a country club and hit up your golfing buddies
Lower cost LP money would be the general public. Just look at Cardone Capital paying out 6% (at least they were a couple years ago). If you can scale raising money from the everyday investor through some vehicle like your own app, fund, social media, or other marketing funnel, you can pay out lower returns because honestly the general public is less sophisticated.
Maybe there are insurance companies out there I'm not aware of, but they're usually not interested in equity checks that small. Family offices would be a better shot.
Interestingly enough I have an insurance company in hand but agreed the MetLife's and Prudential's of the world are writing much larger checks.
What's the best way to find family offices?
Awesome, my experience with the insurance Cos has been on the higher equity check end so glad to hear there are some playing in that sandbox. For family offices there are a few conferences that can actually be decent, but the other thing I would try is reaching out to architects/lawyers that you know, they should have some clients that have a lot of money and could make introductions.
EB5?
Not familiar with EB5 but from my understanding is that it's a long process with a lot of paperwork so doesn't line up well for acquisitions.
The headache isn't worth the trouble in my experience unless you're desperate.
Neither of those is a good bet whatsoever. You’re going to want to target wealthy individuals. Even family offices hire people sophisticated enough to see how stupid a 6% pref is.
You want to find doctors, lawyers, partners in professional services firms and other people with a reasonable net worth of $5-$20 million they did not make through real estate or through investing (other than maybe someone who got lucky putting all of their money into an apple or a Tesla for 20 years).
Some of those people will hear real estate and think oh wow, I heard diversification’s good and I have the chance to invest in a real estate deal! 6% pref? Sure, I guess that sounds good since I have no clue what the industry standard is!
Basically, you’re looking for dumb money. The suckers. The people who will accept such shitty returns they’re basically getting swindled out of their money, from their pocket straight into yours. And that isn’t family offices and that certainly isn’t insurance companies.
It’s wealthy but not super wealthy people in the nicest suburbs in the biggest cities across the country. These people live in Scarsdale, Chevy chase, Brookline, Gladwyne, Naples, kenilworth, Scottsdale, Pasadena, Palo Alto, etc etc etc…if you had connections to such people you’d be well on your way to 6% LP money, that is a fact.
Second Chevy Chase for being the dumb money
What would you say would be appropriate pref return in this environment? Or would you structure something differently?
Maybe I'm missing something but isn't 6-7% market rate pref for core+ industrial and multifamily these days? Maybe that's just in my markets.
Well, the lower the better for the GP of course. What’s appropriate isn’t really relevant, there are two questions to consider. What’s common and what can you get away with? What’s common is 8-12% offered by the largest, most successful developers in the country. So what’s someone to do who wants to invest as an LP and has that opportunity? Do they go with a mom and pop developer for 6% or a Carlyle for an 11% (last I heard)? It’s an easy choice for them. But people who aren’t in the industry and don’t have wealth managers that connect them with such opportunities simply don’t know this and some of those people would be willing to accept a 6% for example - I worked for a developer at one point that did raise money from dumb money and actually did get 6% pref on some of its deals.
Anyway, a more straightforward response is that mezzanine loans are around 12% today and investing in equity should carry a risk premium to that, so the pref should be at least 12%.
You mention pref but what kind of promote structure are you seeing on the back-end?
Typically 15%-20% promote above the pref.
Disagree with your final comment. Mezz may be at 12% but that doesn’t mean Pref should be at 12%. It means the equity should price to an IRR higher than 12%. AKA doing a deal for 13+%.
Yeah totally right, I was second guessing that comment myself. LPs need a >12% IRR, but that is of course not completely dependent on the hurdle.
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