Hey everyone
We are currently looking to structure our first JV for a MF development deal. There is some confusion in the office regarding structuring and modeling the promote. The question is, how long is the typical hold period for a deal like this? We typically look at deals as a 10 year hold. However, if we assume that the deal is a 10 year hold, the IRR in the deal looks really low and the sponsor barely exceeds the pref threshold. However, if we assume a 5 year hold (2 years to develop + 1 year to stabilize) the deal looks much better for the sponsor.
So the question is-- -How long is the typical hold period when modeling out MF development deals? -Does taking out construction debt with a perm loan impact the waterfall distributions? -What happens in the event that we decide to buyout the sponsors equity stake in the deal at some point?
Sorry for so many questions! Thanks.
How long is the typical hold period when modeling out MF development deals? There is no "typical hold period." It is entirely dependent on the business plan agreed upon at the onset of the investment.
Does taking out construction debt with a perm loan impact the waterfall distributions? To the extent that the refinancing proceeds returns a large chunk of capital to the investors, this will increase IRR signficantly.
What happens in the event that we decide to buyout the sponsors equity stake in the deal at some point? What happens? You buy them out. How it happens? There are many different buyout provisions: (1) Shotgun Clause, (2) Third-Party Appraisal, (3) The Cake Scenario (I'm making up the name but its when one party selects the value, and the other party decides if it's a buyer or a seller at that price). There are plenty of other buyout provisions so feel free to chime in.