I am getting ready to go raise a multifamily fund and want it to have the ability to invest in both value-add and development deals but hold long term (7-10years). I am currently playing around with the structure of the fund.
I have seen 7-8% pref then split 80/20 type of thing but im worried that with the nature of the long-term hold strategy the pref will take forever to paydown and the GP won't get to participate in the operational cash flow. I have seen some crystalization of interests upon stabilization that might work. Also are fund of this nature usually running the waterfalls on a deal by deal basis or does the entire fund have to hit its pref before moving to the second hurdle?
Would love some feedback. Thanks,.
Will you/the fund be investing directly into the deals or will you have an owner operator/sponsor that is the GP at the deal level and your fund is the "LP" (in quotes because you can structure it where you have almost as much say in decision-making as the sponsor)?
Our fund typically invests in each deal as an "LP" resulting in a fund of properties diversified across various sponsors, investment timelines, locations, etc. The sponsor gets a promote at the deal level of anything above a 10% preferred return (pari passu and compounded quarterly), then we (the GP of the fund) get a 20% promote on anything above an 8% preferred return (accrues, but does not compound). Our fund waterfall goes 8% pref -> return of capital -> 80%/20% so we are all back-ended. If the fund does well (as anticipated), then you typically end up with all the LPs of the fund having their preferred return paid and capital returned with a few deals still active in the fund. Then, as the GP, you get 20% of all cash flow and then any sale proceeds.
You could structure it as the above, but only returning LP capital when there is a capital event. That way if you're distributing above the pref, then you get 20% of the cash flow over the pref.