Currently working on a ground up deal as an LP. Looking to add value to the convos and wanted to see what to look out for as an LP... well versed in waht we need on acquisitions, but what do you guys active in ground-up deals lookout for?
Anyone on the development/GP side, what would your perspective be, and what have you seen your clients ask for that provides them protection?
Appreciate the input
Conservative LP in ground-up multi. As you probably know, most business terms are negotiated in the term sheet. So best advice is to look at your firm's term sheet and pick out every point that can be tilted in your favor. Below are a few high level points I can think of:
Equity split - 80%/20%, 90/10, 95/5 etc. We like to max out at 90/10 so the developer has more skin in the game. I've seen several try to go 95/5 or even 97/3.
Underwriting fee. Try to get some sort of fee for your group on the front end, maybe 1-3% of your equity commitment with a max of $500k.
You can also try to negotiate the development fee and construction management fee down but good luck.
Waterfall - try to get your pref hurdle as high as you can. We shoot for 10%+. But don't give up too much in the upper hurdles or else you'll be kicking yourself when it's a home run.
LTC - several developers are going 55% LTC. we try to push them to 65% but not higher.
Completion guarantee will have some carve-outs for cost overruns, typically RE taxes, op deficits, interest and force majeure. We've try to get the guarantor to cover as much as possible so we're not on the hook when shit goes wrong.
Plan & cost review, monthly construction progress report and other third party reports - Usually ordered by the senior lender. Ask the senior to piggyback off their reports and get a reliance letter signed.
GC contract - LP usually has the right to review and approve the GC contract. Unless your a construction guy most of this will be over your head. However, if the GC is affiliated make sure to check the reporting requirements for draw requests. Ask for a list of all invoices for every draw. Check the removal rights as well.
Major Decisions - Try to get approval rights for; changes to the plans ans specs, subcontracts over a certain $ amount, cost saving reallocation over a certain $ amount, property management co and contract, draw requests, op budgets, doc modifications, equity calls and sales/refis.
If I think of anything else i'll add.
Because we ask nicely.
A dev taking a CM/owners rep fee is a joke IMHO unless they are a a true CM/GC shop and an affiliate of the developer who will staff a PM to the deal.
Luckily the market doesn't agree with you. If I have to manage construction and construction workers, and employ someone to do so, I'm charging a fee for it.
From an LP's perspective charging the project a fee to hire/pay for a 3rd party owners rep is way different than just taking additional fee as the devloper to be a "CM" on a project where in all likelihood you will be hiring a GC. That kind of "CM" fee is going to be viewed the same as a developer fee and I would want it held back in the same manner as your devleoper fee. It it makes you feel better to split it out thats fine, but I'm looking at it as developer fee.A true CM will replace a GC. While it is possible you have that capacity in house as a developer I find it to be the exception rather than the norm.
I think we're just talking past each other.
As an example, we always collect a CM fee. This fee is capitalized through the project, like the Development Fee, held back like the Dev fee, and is paid out in installments throughout construction (typically a set number, but I've seen it based on % of hard costs billed too). We collect this CM fee because our construction managers, who at one time worked for a GC, manage the GC.
It's not the same as the Dev fee because it is a % of hard costs (typically 1% for us), not a % of the overall development budget (typically 4% for us), so it has to be broken out.
I'm not sure what you're getting at with the whole "true CM" thing, much less a construction manager replacing a GC. Every firm I can think of short of those who build in-house has construction managers and third party GCs.