Industrial RE GP / LP Structures
New to the site. I've been looking at some of the RE posts to try and answer my questions but decided to create my own post to leverage knowledge from the group. Looking to raise $5-15MM equity to pursue identified niche industrial RE assets (...no not data center development). Experienced as an industrial operator (15+ years) with recent track record (within last two years) optimizing a portfolio of comparable assets that led to a ~4x MOIC for the LP equity at exit within 2.5 years. Didn't have control at the GP-level so exited the opportunity a lot sooner than I wanted (we were in the middle of a number of organic growth development opportunities that would have materially enhanced operating cash flows). Looking to re-up to do the same but trying to understand the best GP / LP structure for a long-term value-added hold (10+ years), that would allow the GP to participate in the ongoing operating cash flows after a reasonable pref vs waiting on an exit to participate in the GP carry. Essentially what is the best structure to attract long-term LPs that are happy with the pref, will received some return of capital from participating in growth in current operating cash flows, allow us to refi and roll down the road. Net result over next 10-20 years, the GP is able to increase ownership in the asset and econs over time. Asset level risk is relatively low (90%+ leased, investment grade counterparties, 5-7 year lease terms, average customer 10+ years). Any thoughts would be greatly appreciated!
2 waterfalls, one for ops, one for capital events.
OPS - LP receive pref of x%, thereafter split y% to LP and z% to GP
Capital Events - LP receive return of capital, LPs catch up on accrued pref, if any, then y% to LP and z% to GP
this
What would be typical splits under both waterfalls?
Pretty much the same as having one waterfall. Promote of anywhere from 20-50% over say, an 8% pref. Like a single waterfall, there can be multiple hurdles, and they can be simple, cumulative or compounding. Sometimes you'll see a cumulative noncompounding pref in both OPS and capital event waterfalls, and then an additional IRR or EM hurdle in the capital event with a larger split to GP.
Based on what OP described, they should offer solid pref with maybe a 3-5 tier waterfall and a min mult of 1.3x or greater to attract long term capital.
OP - you prove out a plan and hit the minimum multiple? You shouldn’t have trouble raising capital from LPs
Something like a 70/30 over a 7 or 8. Or 80/20.
If he can truly deliver a 4x in 2.5 years, I would be asking for 50% over an 8% pref. Creating that much value, the LP's will get back way more than their contributions at a refi and then profits are split 50/50 going forward with no cash left in the deal. Plenty of LP's would jump on that.
Good point. Why not, get your money OP.
All of these are great ideas with a solid enough framework to work with a majority of LPs.
Another option is using a promote crystallization. Basically whenever you have completed your biz plan or the value has increased to a level that it makes sense, you run the waterfall based on what the asset would sell for.
For simplicity sake lets just say the equity split to start is 10/90. When you run the hypothetical proceeds through your waterfall, you would pay the pref, return LP capital, and then split the remaining cash based on your promote structure. You then realign ownership interest proportionate to the proceeds. Lets say you are entitled to 30% of the remaining cash after the pref and return of capital, you would then own 30% of the asset going forward.
I have no experience with the crystallization method, but I don't think I'd agree to it as an LP. If I am understanding correctly, this is all on paper, no actual cash to the LP's in regards to making them whole on the pref and returning capital? What happens if the value plummets? Does the GP still get their 30% even though the LP might not even get all their capital back? Or is there a clawback typically?
It is as straight forward as it sounds, there is no cash distributed and no claw back. The only time I have seen this used is in a value add deal with a long term horizon where the sponsor doesn't have the power to sell or refinance.
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