I may be able to bring an LP who is willing to commit essentially more capital than we could possibly put to use with the size of our projects. I haven't yet finalized my compensation structure with the GP, and I have done some sensitivity tables of what I would earn based on potential IRR's of the project. I could obviously get basically nothing if the GP screws up with the operations, or the market turns sour, and we don't earn our promote (but would earn part of the 1% asset management fee).
But I've taken a ton of meetings, done a lot of work on the presentations, gotten some great interested parties, and the GP is unwilling to settle our end of the contract (and I think would be very dumb to not do so) right now. We are halting discussions until we can come to an agreement on our end. I think for the amount of work I'm doing, the risk I am taking by not taking cash compensation, additional risk I am taking by not being in the LP box, but rather taking a share of the GP, 25% is not unreasonable. In terms of the value I'm bringing, it's probably half the value, and in terms of the amount of work, it will probably be 15-20% as much work as the investment team does. Then again, they will be compensated outside of me for a lot of that work, acquisitions and disposition fees, development fees, etc.
What do you think?
FYI, the investment team is just two guys.
Are you contributing real cash equity (not including your fee) into the deal? Also will you also be a guarantor for the financing?
No. All my cash is tied up in illiquid VC investments.
Just call yourself a placement agent and take 2% of the equity raised as a fee. 25% of the GP is a lot for them, and a lot of risk for you.
The point of contention is the LP wouldn't want the cash being reduced, the GP couldn't afford to pay that out of their pockets. So the logical step is getting share of GP. It is a lot, but I'm bringing them a lot, and a very unique lot. But it is a huge risk for me, and I'm willing to take it
If you're committing yourself financially, and taking on risk, then sure, go for it.
If you want 25% of the developer's upside merely for placing equity, then expect to be laughed out of the room
May I ask why you think so? Because several people I've asked have said they think it's reasonable, given I am bringing in all the equity, the GP doesn't have a major prospect for equity anywhere near this size right now, and I have been doing a significant amount of work to raise it.
So what's the right % to ask for in your opinion?
Because someone in your shoes who is an equity placement broker receives about 0.50% to 2.00% of the equity raise for doing your exact role. What you're asking for is multiples of that amount.
But they either get paid in cash or they can roll it into the deal as an LP. If the property performed well, 2% of LP cash flows ends up being the same as 10% of GP cash flows; so then what's the risk premium on taking the high-risk GP entity, where you could end up not earning a promote and walking away with .2% of the LP cash flows.
Can you walk me through your math on "2% of LP cash flows ends up being the same as 10% of GP cash flows"?
As I understand it, assuming it was a $100M deal and there was no debt, your 2% of the $90M raised would equate to $1.8M, which would raise the cost of the project to $101.8M. Your $1.8M would be treated as LP equity and you would receive a 1.96% interest in the LP economics ($1.8M divided by $91.8M, which is the original $90M from LP plus your $1.8M).
I did a quick back of the envelope analysis of a hypothetical scenario
JV Waterfall
Year 1 - (101.8)M Year 2 - 20M Year 3 - 20M Year 4 - 20M Year 5 - 150M
In that scenario, your $1.8M interest (inclusive of profit) would be $2.99M.
If you were to get 20% of the GP Proceeds, which in this case would be $11.49M, you would be getting nearly 4x what you would receive under a normal arrangement if your 2% equity fee was rolled into the deal as an LP.
Yeah the difference is I bet the LP is putting up like 99% of the money.
and that the GP receives 50% of cash flow above an 8%...
The reason I said that is because I see it like this if it is a $100M deal (LP 99% GP is 1% ) the GP is 1M, 25% of GP is 250k but 2% of the 100M is worth about 2M. Depending on the promote structure this $250k might be worth more than 2M, or significantly less.
There is actually alot of key info missing here. Like what the equity placement fee assuming a 2% cost would be and what the EV of the GP position would be. Would he be in the GP and also be getting pari parssu construction, AM, Acq/Dispo Fees? Would he be in the GP and actually get a pari parssu share of the promote? Would his 25% of the GP be Pari Parssu withe the LP before a capital event?
I am thinking that what he is asking could be reasonable, but this question is pretty awful for a forum when we can't know the detail and depending on how you look at it could yield wildly different answers.
If we don't know what 25% of the GP is worth and we don't know what 2% of the total raise is worth we definitely don't have enough info to answer the question.
I think this guy has a deal he could cut, but he needs to do some math himself and not ask an anonymous forum.
I doubt an LP who was introduced via this guy is doing a 99/1 deal with a firm they don't even know.
To your point about needing more information, you are right. However, I ran it based on a hypothetical scenario in which he received 20% of the promote and the result provided him 4x the expected value than if he was merely an LP. Now, if you tell him that he can participate in the upside of Dev Fees, GC fees, Dispo Fees, Management Fees, his expected value is going to be that much greater. Perhaps even as high as 6x what he would receive if he receive LP economics.
To Ozymandia point, I do not think the "value" he provided is worth 20% of the promote and perhaps fees.
OP - Did the sponsor retain you with some sort of contract stipulating that you were their equity placement broker? Or did you merely introduce them to someone without a deal in place and now you are asking for 20% of the promote? Next time, I would make sure you have this all in writing before you make the connection. Otherwise, this is the risk you run.
They retained me, we just are re-negotiating the terms of payment.
It will probably be a 95/5 deal, as the LP wants the GP to have significant skin in the game.
If the property level IRR is 27.7% (which is pretty darn good), and the structure is 9 pref 80/20 til 15% property irr 70/30 til 20% property irr 60/40 therafter
and I were charging 4% of LP equity, that would equate to 13.17% of GP promote.
I am not proposing taking a percent for the development fee. But if the property returns 20%, it's the equivalent of me getting 20% of promote and asset management fee. If the property returned 15% irr, my take would equate to 35% of GP promote and asset fee. And of course there's a chance the deals go terribly and I earn basically nothing.
So it's all about risk-weighted returns. If I run the DCF on the project and compare the dcf invested as an LP vs dcf of my equity as a GP, I would guess that it very closely supports my ask.
Yes they will be doing more work than me identifying projects, and for that they would make 3 times what I would make. They will also have a development fee that will earn them potentially more than I would earn on the entire deal.
So while you ran one scenario, you didn't run a whole bunch of other scenarios, and you didn't run a dcf, which would show the later dates of payment, and the much higher discount rate for GP cash flows vs LP cash flows.
So what do you think is fair then, for me to ask for?
Would you mind attaching an excel of your calculation? I want to make sure I am understanding your point.
@The Duke of Wall Street went into this in far more detail than I had meant to, and I definitely insist that you reference his math over my answer.
That being said, making money in real estate is entirely a factor of risked capital. If I am going to develop a building, I'm not only putting up ~10% of the equity (which goes to shit first), I'm also probably guaranteeing the construction loan. In other words, I'm getting paid a lot of money because I'm taking on a massive amount of risk. If the project is overbudget, I'm funding that. If I deliver the building late, I'm funding the interest payments to the lender. If I don't hit my numbers on the lease up/sell out, my lender and my LPs get paid first. In other words, all my profit margin comes if and only if my project delivers.
By contrast, take your scenario. You have some (presumably) cheap equity willing to come into the deal. That is awesome, and you deserve compensation for having that relationship. But you are taking no risk. Your contribution to the overall success of the project is done before a shovel ever hits the dirt.
Lets even think of it another way. You say you've done "significant" work to bring in this equity. What does that entail? 20 hours of work? 100? 200? The GP in this deal is going to be spending 20 hours a week for the next 2-3 years getting this project built, and that's without the financial risk. You are spending a tiny fraction of that time working on this deal. I don't mean this to be condescending or insulting. But I am in a development position, and I can tell you straight out that you aren't properly comprehending either the massive financial commitment that a GP puts up, or the huge amounts of time (and associated overhead) that they are spending developing the project.
To wit, I think that if you said you'd roll over your dollar fee into the project in return for a somewhat larger stake, that would be reasonable. As in, if your equity placement fee of, say, 2% was 500k (and I'm making that up), you could reasonably say to the developer that you would invest that fee into the project in return for 750k worth of the developer's promote. That's poorly phrased, because I've been drinking, but I assume you get the point. If you are willing to risk real dollars, you have a leg to stand on in order to make the case that you brought in equity that no one else could and should be compensated beyond what a traditional equity broker should get.
If all you're asking for is to take a huge piece of the upside with no risk, any developer is going to tell you to go to hell. GPs care a lot less about metrics than you'd think; it's a risk business
I completely disagree. If they can't afford to pay you a placement fee you should be getting a % of the promote.
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