GP equity in Industrial Development deal
My dad is considering an LP investment in an industrial development deal. I work in MF lending so really don't know much about industrial or development. Anyway I flipped to the S&U page of the OM and saw that the GP equity is only 3.5%. I'm assuming this is already pretty low, but how low is it compared to what yall in this space are seeing? Is this a red flag in any way? Thanks in advance.
edit - the GP fees are below (is the dev fee a normal figure, and are PM/AM fees typically baked into the GP fees?)
Dev fee: 4.5% hard and soft costs
PM fee: 3.0%
AM fee: 3.0%
bump
So…the answer really is it depends. Many times you’ll see 95% / 5% as the LP / GP split. However, as the deals get larger, you’ll see the GP investment decrease as a percent. The reason being you are generally looking to see the GP invest a significant amount of money. However, if it’s a $150MM deal, and it’s 60% debt, 40% equity, the total equity check is $60MM. For the GP to invest $3MM, that’s a large amount of capital. Even if they invested half of that, I bet you would say they put a significant amount of their net worth and liquidity on the line. TLDR you need to look at it in the context of how big the investment is and how much money are they putting on the line. In my example above, if the GP had to put $3MM into the deal, they may not have the liquid cash on hand or even be able to make that investment, even if they have an amazing deal.
It's a not a huge deal - Not looking at the OM, but I believe the GP investment is only ~$975k and they are making almost all of it back on the dev fee ~$925k. Is this normal?
Yes, making most of their money back in the dev fee is normal. Usually, it’s actually more. You need to let the GP profit. A lot of people don’t realize this, but without all the fees, the GP can’t keep the lights on. If they can’t keep the lights on and hire enough staff, well there goes your investment.
It was always funny to me when I was on the LP side to see how we would squeeze our GPs fees as low as we could. But in reality, if they can’t keep the lights on, there goes the safety of your investment.
The GP business is a service and fee business wrapped into a real estate investment business.
Work in the industrial investment space (stabilized and development). Those fees are market. Question is what are they assuming for their promote? More importantly, are they taking the construction and lender guarantees? Holistically, the GP should be incentivized to outperform, but they should also be held accountable for the commensurate amount of risk. The above are two ways to de-risk from your LP side. Sure this is quite basic to most on this forum, but figured I would add.
Thanks - the investment structure is below. How does this look? I was assuming they were lender/construction guarantor's as the GP.
100% to LP until they have achieved a return on their invested capital and a 9.0% IR
70% to LP and 30% to GP as promote until the project investors achieve 14.0% IRR
60% to LP and 40% to GP as promote until the project investors achieve 17.0% IRR
50% to LP and 50% to GP as promote thereafter
Few drinks in at my favorite, local sushi spot so apologies for any grammatical errors! Doing some quick math and with that equity structure (GP @ 3.5%), the GP is earning is a 38% promote in the first hurdle, 61% promote in the second hurdle, and 93% in the last hurdle. Whoever the GP is, they’re trying to pull a fast one on you guys by stating the distributions amounts vs. the actual promote percentages. Those promotes are wild. I’d say 20% promote, 35% promote, and then a 40-50% promote on the last hurdle
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