GP Fund Economics - Developer

Based on the most helpful WSO content, here are some insights on GP fund economics for development projects:

1. GP Capital Commitment:

   • Typically, the GP is expected to commit a portion of the total fund. In your case, you are contributing $1 million to the $4 million fund.

2. Investor Expectations:

   • Investors in the GP portion of the fund generally expect returns that align with standard LP hurdles. This means they would receive a preferred return on their capital before any promote is paid out.

3. Promote Structure:

   • After the preferred return and return of capital, the GP typically receives a disproportionate share of the profits, known as the promote.
   • A common structure is to allocate a percentage of the total promote to the GP investors. You mentioned considering 15% or 20% of the total promote, which is within the range of typical market practices.

4. Preferred Return:

   • The preferred return is the minimum return that LPs expect before the GP can start receiving the promote. This is usually around 8-12%.

5. Waterfall Structure:

   • The waterfall structure dictates the order in which profits are distributed. A typical structure might look like:
     • Return of capital to LPs
     • Preferred return to LPs
     • Catch-up to GP (if applicable)
     • Split of remaining profits according to the promote structure (e.g., 80/20, 70/30, etc.)

6. Simplified Approach:

   • To keep it simple and avoid additional hurdles, you can align the GP investor capital with standard LP hurdles and then allocate an additional percentage of the promote to the GP investors.

By following these guidelines, you can structure your GP fund in a way that meets investor expectations while keeping the economics straightforward.

Sources: Promote Question, Unique LP/GP Setup - Governance Mechanics, Economics, Other Fun Considerations, https://www.wallstreetoasis.com/forum/real-estate/gplp-structure-friends-and-family-capital-jv-structure?customgpt=1, Promote vs Carried Interest vs Catch up, LPs/Investor Return Structure