Say you have the benefit of having rich friends and you'd like to acquire, as the GP, multifamily real estate with the intention of holding in perpetuity. That is, never sell.
What is a fair and equitable profit split for such a transaction that would allow for majority ownership by the GP after some hurdles are achieved?
I have a few in mind, but would love to get any input based on what you may have seen / done in your careers.
Thanks!
It might be easier to use equity multiple hurdles than IRR hurdles if it's long-term and you don't have the right to buy people out.
I was working on a similar raise recently it was 6% pref, 50/50 split after the pref. No fees (other than property management).
We had another group that wanted to come in and was solely focused on the splits and making sure we didn't sell prior to Year 7 so we offered ((90/10 deal) 8% pref, 20% promote to a 12% IRR, 25% promote over a 15%, and then 30% above 15% IRR. Since I presume your deal is small like ours was and you'd like to make more than $100 a month, in this instance we loaded up the fees. 1% acq, 1% upfront financing, 2.5% AM, 1% on any refinance, 1% disposition and above market PM fees. We also had CM fees for rehab work and other ways to make money.
Basically I'm saying there's no set way to do it.
I used to work for a family office that dealt with syndicating HNW investors money into middle-market ($5-$20MM) multifamily RE deals. Although they pitched the deals based on a 5-year hold, their business plan was to always hold in perpetuity and create "mailbox money" for future generations. Basically, they were selling the cash-on-cash numbers which is what their investors were looking for. The deals were generally medium to sometimes heavier value-add.
Their typical go-to structure was the following:
1) 1% AM Fee (Equal to 1% of initial equity invested) 2) 1% Acquisition Fee (Equal to Gross Purchase Price) 3) .50% Refinance Fee (Equal to new loan amount) 4) 6% pref (that would compound if accrued as unpaid) followed by a 70/30 split (70% LP, 30% GP)
They would typically put it 5% of the total equity requirement as an LP investor as well to show conviction in the deal and have skin in the game.