Can anyone talk to the specifics of how institutional joint ventures are set up? The magnitude of the capital they can deploy are huge so not sure how the operators can do it financially unless they are just rich AF.
When operators JV with one large check, I am curious:
1) What is the approval process like? I assume deals are mostly less discretionary and you need to go to IC at the JV entity?
2) Does the JV have a typical GP/LP relationship with the operator or is the capital source the whole equity position? (and operator getting small % of promote?) What does this partnership look like?
3) Does the operator need to bring co invest or (the bigger problem IMO) have a balance sheet to satisfy debt/loan requirements, or do these problems go away with the partnering institution? These partnerships can be huge in $$$ sense so wondering how operators solve for this problem.
Are there good examples you like of folks who worked at institutional shops go off and JV with a capital source to start their own operating group?
Short answer is they are all different. My shop has 5 JVs with private equity groups and 2 with pensions. We’re a medium sized developer in a niche asset class.
1.) for us, we take a deal to our IC then send it to the JV partner for them to take it to their IC. I think this is fairly straightforward and a normal process
2.) yes the promote will be baked into your JVA in the document phase. If you’re familiar with waterfalls they are pretty straightforward normally. Pref changes on acq vs dev and then splits change on expected return of the asset class
3.) we have JVs where the LP is actually 100% of the funds and then there is a synthetic promote. Others were 1%, LP is 99%. Some were 5% and LP is 95%. It all varies. In the early days we raised friends and family to fill the GP bucket for big deals. Now we have partners and a balance sheet to fill it as well as investors who will help fill it on an as needed basis
Hope that helps and happy to address anything else
What’s a typical waterfall for acquisitions vs development? Acq fee %? Do you guys charge a pm fee and am fee? Am fee on gross collections or equity invested?
Not sure there is a typical one. Would say prefs start lower for acquisitions and are higher for developments. We charge am fee on equity deployed usually, and yes we also charge pm fees
How big are these deals? Is it 100% or 99%/1% for the LP GP or that's in the cogp
OP here- thanks for the feedback!
I'd imagine it's like a lot of aspects of real estate. It depends on who you are dealing with. I worked at a shop that primarily did JV deals with institutional partners. JV partner typically contributed 80-90% of the equity with the remainder coming from the operating partner. Operating partner charged an acq fee, an asset management fee on the NOI, and a dispo fee. Cash flows split pari passu until the promote was hit, varied based on other terms, but typically 8% to 12%.
This is accurate. One caveat, I typically see AM fees calculated from EGI not NOI, but the AM fee sits below the line. 90/10 is probably most standard with varying waterfalls as other contributors mentioned above - generally see 4 tiers and there can be nuance as far as what cash outflows at closing get included in a waterfall calculation
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