So I'm negotiating with a big hedge fund on a potential RE investment in a GP I am representing. The potential LP is very aggressive and wants a 10% pref, 80/20 to 20%, 70/30 to 25%, 65/35 there-after. They want control on the investment decisions, they want payments to be paid back first, and for the GP's to put the bulk of their net worth in the deal.
The GP has had good returns (albeit on much smaller projects than the ones proposed) and so they feel entitled to higher fees. They also want a standard 4% development fee, and probably a 1% management fee, as well as running the hotel sales, marketing, ad buys, accounting, etc for 15% (which seems high by about 3-5 points). The hedge fund sure as hell isn't going to want these guys to take the development fee out up-front, and I'm sure they won't want to let it be invested in the deal pari with LP money, and I'm sure they are going to want to subordinate the asset management fee until they've been paid back + their pref.
It could potentially be a couple hundred million in funding over the next 5-8 years, so it's a meaningful potential.
Any thoughts/info/advice on what's normal structure for a new development hotel project these days... the pref, promote structure, fees, fee payout, LP control over investment direction, etc.
Thanks.
How much is the GP putting in?
Subordinated fees isn't typically market other than that most of LP ask seem pretty fair.
What's the flag and what type of hotel is this (full scale, mid scale, limited, etc)? 15% mgmt fee on a hotel os f*cking thievery and the hedge fund should walk away from this deal if the developer doesn't come down on that, all hotels even heavily operated resorts charge 3-4 points on top line revenues max, even if there's an EBITDA share it doesn't come out to 15 points from what I've seen.
I've never seen a developer defer the entire development fee to equity, how else can they maintain their operating expenses? I've seen a portion of the fee deferred to equity and then subject to the standard equity earn outs of the sponsor (basically like cash the gp puts in) on the back end.
Its non-flag, boutique. The 15% includes marketing and ad buys as well. Boutique managers are generally 5-7%, then marketing covers another 2-4% and ad buys can be another couple points. It could add up on the high end to 13%. But yeah, I think they should be more around 10% total for all that.
I'm not following the math here. The mgmt fee is usually 3-4 points and the marketing expenses are a pass through to the hotel project company despite the employees/initiatives being undertaken by the mgmt company and that's usually 6-7 points. Are you adding those points to the total mgmt fee earned, since those are just a pass through. I'm not sure how boutique your flag is, but I'm speaking from my experience in other boutiques (SLS, etc) type flags where we were the sponsor.
I'm more curious than suggesting otherwise as I've never dealt with smaller flags so if this is market, first I've seen it...
It’s hard for the deal to be a success when the GP can’t keep the lights on.
I believe that in this case, the support of a third-party factoring company would be helpful. Attracting external sources of financing will help preserve and increase the company's working capital, but without increasing the credit burden. Thае is the optimal structure for a new hotel project these days. Everyone's policy is evident here. No one wants to lose their potential profit, hence the development fee, management, marketing, and so on. The development of my business has helped me a lot with this company https://factorforyou.com/texas-factoring-companies/. I was able to significantly increase my company's cash turnover thanks to these guys. In any case, at least good advice from competent professionals will not hurt anyone.
Market on development fees in my experience from our past 6 or 7 deals with various LPs is that it is generally difficult to get them paid out before a construction loan is finalized...maybe straightlined draws during the predev period to cover up to 5% of the total fees. Once a construction loan is executed, you can sometimes negotiate an up front payment of a portion of the fee, although that is aggressive--we've been successful on two deals to get 25% paid at loan closing. After that, whatever is left is typically straightlined for payment from start of construction to substantial completion.
Our go-to is usually 20% at closing.
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