How do companies who develop rental properties (think Tishman, Greystar, etc.) structure their deals on the development side?
I know these companies will raise equity on a project by project basis. Are properties built with the assumption that they will sell in X number of years? Are deals structured using a typical IRR based equity waterfall? Is the disposition year (or range of years) set prior to development?
Any information would be great.
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They usually have a fund, so they don’t raise deal by deal (at least for the GP tranche). They will most likely seek a 20%+ IRR on a 36 month “merchant scenario”. With YOC expectation ranging from 4.75-6 depending on the market.
^^ multifamily
Disagree with the above guy saying they usually have a fund - he is correct re: return targets though. Typically 20%+ deal level IRR assuming a merchant build with 6% yield.
Waterfalls vary based on the deal and how favorable it is, but yes it's typically an IRR or preferred return-style structure. Number of hurdles and promote structure vary based on strategy, market, etc.
Depends on how many capital partners are interested, what they want re hold and how appealing the different options are to the developer. Developers who also operate it (Greystar, Hines etc) will ideally find someone doing a build to hold strategy so that they can get the property and asset management services too. Hold period can be as short to stabilisation, or long term hold 10+ years following that. On projects held to stabilisation I’ve seen a standard IRR based waterfall promote. On ones where the capital partner wants to hold it for 10+ years after stabilisation, I’ve seen an equity promote at stabilisation and then a running promote received each year based on exceeding a certain cash on cash return, with a significant promote paid at exit if it hits business plan.
Timeframe impacts where IRR hurdles need to be set at so it’s hard to give a one size fits all. As you’re calling it BTR rather than multi family my guess is you’re not in the US. In Europe I’ve seen minimum returns for pension funds of 12% merchant build / 8% long term hold, and for opportunistic funds 15%+ merchant build.
Edit: adding to CREnadian’s point, I agree that most developers don’t have funds for this. They look to capitalise it deal by deal or with programmatic JVs as it helps mitigate issues around promote / carry being pooled across funds. For the GP’s shareholding I would be less concerned about the form of this I.e. whether it’s a fund or just their own capital to put into the deal, what matters is them getting the LP comfortable the funds are available.
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