Do you think it's justifiable to ask for 25% of the GP for being the fund raiser for the projects?

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.

Comments (22)

Mar 6, 2019

Are you contributing real cash equity (not including your fee) into the deal? Also will you also be a guarantor for the financing?

Mar 6, 2019
Merchant_of_Debt:

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.

Mar 6, 2019

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.

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Mar 6, 2019
Trunk Yeti:

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

Mar 6, 2019

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

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Mar 6, 2019
Ozymandia:

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?

Mar 6, 2019

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.

Mar 6, 2019

@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

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Mar 7, 2019

I completely disagree. If they can't afford to pay you a placement fee you should be getting a % of the promote.

Mar 10, 2019
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