Development Manager getting 10% GP Stake at Boutique Multifamily Development Firm for each Development-Is that fair?
I work at a boutique multifamily development firm where were working on average deal sizes of $50M. I'm less than a year into the business so I'm not getting any carry but I have seen the carry breakdown for the GP LLC for one of our deals. Very lean company where we basically have two partners who fund the equity. For example on a $50M deal were getting debt at 67.5%, and having an LP Partner coming in for 90% of the equity. On top of that were also bringing in another CO-GP equity partner for the remaining 10% equity slug, so in this case $1,625,000 and in one deal were doing this CO-GP is contributing 80% while we contribute the leftover which in this case is like $325,000. My question is that the two guys funding the deal take 80% of the GP LLC or 80% of the $325k they put up, and then they give 10% to the one development manager who sourced and basically is doing everything to put this deal together, while the remaining 10% is split up between a project manager, and one other guy who basically functions as a CFO. What I'm trying to comprehend is how much money the non funding guys like the development manager could potentially make, and whether the development manager, project manager, and CFO would also get part of their share in the $2M dollar development fee, which is paid out with 25% at closing, 50% throughout the project, and 25% at CO. On this deal our underwriting has our best case scenario hitting a 10x equity multiple.
Does this carry participation seem good or bad compared to what others in the industry are getting? Is the amount of equity my firms contributing unusually low or par for the course? One thing I was surprised about is that if I were the development manager who has been working my ass off to put together these large institutional sized multifamily developments that are hard as hell to do when your just a small firm competing against much larger players is it really worth it when essentially your only getting a 10% equity stake out of $325k, equating to $32k. I mean I could see the case if that meant the development manager got 10% of the development fee but I'm not sure that's the way it would work. Also don't really think a 10x equity multiple is realistic to bank on. Maybe a 5x equity multiple, which means he'd walk away with $150k which when you break down the timeline it took to put that deal together your talking close to 4 years to make $150k or $40k a year, which I mean I see guys who wholesale houses making that by flipping a contract. So that's my take from having a bird's eye view of how my firm operates and I could be totally wrong in some of my assumptions but that's why I decided to post as I know there are certainly people who have better insight into how all of this breaks down and would appreciate any insight.
If you’re less than a year into the business and you’re getting any piece of your GP entity at all, that’s generous (unless you have a really small base). It also sounds like they’re essentially diluting themselves by 20% and ‘giving’ you all the other 20%, meaning that you don’t actually have to contribute up front money. That’s generous as well.
Until you are in a position financially to contribute equity yourself and have a balance sheet to help on the recourse side of things, it's going to be very difficult to see much growth in your carry within the GP entity. Again, unless you have a very small base and no other 'bonus' sources.
The primary reason for the existence of the promote structure is to reward the GP for assuming higher risk than the other equity partners. If you aren't actually taking any risk, it's great to get any slice of that pie at all.
CRE or Ricky Rosay Can you guys provide any insight regarding this topic? How great is the upside in operating within a company that provides this type of structure?
What are you getting 10% of--the promote cash flows that come back to the sponsor entity; the development fee; the GP pref...not sure I fully understand.
Yea I mean your question is basically my question. All I know is that their getting 10% of our companies LLC in the deal. I'm assuming that they would be getting 10% of the GP Promote Cash Flows, but was curious if getting 10% of the development fee was also par for the course in these types of arrangements. I'm just an analyst trying to determine what the incentives the development managers have for doing a good development deal and if it's really worth it when your essentially only getting a $30k stake in a $50M project. It's a great learning experience don't get me wrong but one would believe there are much easier ways to place $30k in real estate and make a quicker return.
If I had to guess it’s 10% of the promote, no dev fees included. Dev fees are how they pay their lease and your salary.
I’m a bit skeptical because of the numbers involved, but if you’re being gifted 10% of the promote, that’s a hilariously good deal for you. I get a % of the promote of my deals, but it’s nowhere near that good.
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