How Much is Equity Worth?
Say you have development experience and want to go out on your own. You have the ability to source deals, navigate entitlements, get the development built, and get it leased. But you don't have capital.
Say you have a friend who has a network of HNW people that he can raise the capital from. To make things more specific, say your total development cost is $20M, you need $3M of equity, and your friend can raise it from 12 individuals who put in $250K each. He would probably also need to sell one of them on providing a completion guarantee in exchange for additional upside.
How much/in what manner would your friend need to be compensated for this? I could imagine him taking a fee out of the total development cost and not being part of the deal, or (more likely) being a partner and maintaining a figurehead role with the investors without being super involved on a day-to-day basis.
In my opinion, equity is your lifeline here. I would compensate this person handsomely (above what you deem to be fair) and use this as an opportunity to grow the relationship.
Yeah it's critically important of course. I'm basically polling the board about what people think is market comp for this.
Equity broker fees are like 3-5% today, if that helps
So, if it's 5% and you want to keep it simple, you could pay him $150,000 which would come out of the total development fee you charge to the deal. Sounds reasonable. Cheap, almost, if it's what allows you to do the deal.
I will say 85% LTC isn’t market for what I’m seeing. We are seeing in class A MF developments 55%-65% LTC (excluding debt funds who can get up too 70ish %).
I apologize if you already knew this and were just throwing out the $3 MM for simplicity.
I had in mind a particular development that is getting roughly that LTC, but I agree that it's typically less. The exact LTC isn't really the point in any case, I'm trying to get a sense of how an arrangement like this could be structured.
Awesome! I figured you were aware, but just wanted to throw that out there since the debt market is pretty crazy right now!
As far as raising equity, I’d say most Brokers are 3-5% range. I’m seeing JLL at 0.75-1.5% for equity $50MM-400+MM or flat fees of $150M-250M of that size. I think the above case of flat fee $150M for equity is favorable to you and him. You can write it into the project cost and have it funded that way.
Also, as you probably know and already did. Don’t forget to add development fee into the project budget, you need to pay yourself for your work.
Look forward to seeing your success on this deal!
Cheers!
Following
Equity is worth 1-2 points, either paid out in cash at close or lumped into the deal as % ownership on the LP side. Personal guaranty is worth 35-50 bps of the loan amount with a lot of takeover rights within the JV.
12 phone calls for $30K-60K? I'm in!
That kind of LTC to me indicates that there is a ground ivnestment in leiu of PIC.
As for what the compensation for equity raise is as others have stated 3 - 5%. But that number is 0 if he doesn't have a securities license. You need to set up the securities documents first.
I wouldn't brush off the completion guarantees. That will cost you big points these days so you better have a great track record.
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