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Yes, 5% would be low for a boutique hotel. For small to medium sized projects, LPs are looking for 10%-25%. For larger deals, 5% seems OK, but not too much lower.
Multifamily here. 95/5 and 90/10 are both pretty typical.
We usually like to see a minimum of 10%. Anything less can be problematic when: (1) The GP's equity can be recouped via fees and (2) if the GP is contributing land, they are contributing it at a stepped up basis, which means they have even less equity in the deal than what the JV Equity agreement states.
How much equity do GPs typically put in a deal when contributing land with a stepped up basis?
Is this a smarter approach? Any other solutions when the value of land has appreciated, yet GP doesn’t want to contribute land?
On a development deal, an LP will still likely expect the GP to contribute between 10-20%.
What do you mean by "is this the smarter approach"?
From a GPs perspective, they would like to contribute the land into the Joint Venture at the highest stepped-up value possible.
Assume the following:
Total Project Size: $100M
Construction Loan: $60M
JV Equity: $40M (90/10 Split)
LP Equity: $36M
GP Equity: $4M
Now - assume that 24 months ago, the GP purchased the land for $2M. After obtaining entitlements and associated pre-development work, they contribute the land into the Joint Venture for $8M. By doing that, the GP will have a capital account balance of $4M and then have $4M returned to them. Therefore, the GP will have a 10% interest in the JV AND will have $(2)M (aka $2M of profit) on their internal equity.
Thanks for the breakdown. Very helpful.
I just can’t wrap my head around the 2m profit part.
How do they take this 2m unrealized gain?
Above comment says GP has less equity in the deal because of this.
Think of it this way. They bought the land for $2M and contributed it to the joint venture at $8M. Think of the contribution as a pseudo-sale of land to the joint venture. Thus, their contribution ("sale") generated a profit of $6M. Of their $6M in profit, $4M goes into the venture and $2M is returned to the GP.
To answer" how do they take this $2M of unrealized gain", it is paid by the new equity + the construction lender. It would be the same as if they were purchasing the land from a third-party. However, in this instance, the seller is the GP. The "pulling out" of equity only works if: (1) the land is being contributed at a stepped-up basis and (2) the required GP capital is less than the value that the land is being contributed at.
Yeah, I'm a day or two away from being under contract with a buyer on a 30 unit value add deal. Well known equity player would go 90/10 or 95/5 on this deal.
You talking absolute minimum? We've done deals with a GP buying in at 50 bps. I'm pretty sure they syndicated half of their equity to another shop too without telling us
Otherwise 95/5 is more common and occasionally 90/10 for ground up dev
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