GP/LP structure - friends and family capital JV structure

Would kindly appreciate folks sharing some deal structures they have seen in the market place for LP capital on one off transactions. The structure I am familiar with seems fee heavy but want to know what others are seeing in the market place. Below are terms I have seen a syndicator use for a deal:

Acquisition fee: 1% of purchase price
Asset management fee: 1.5% of equity
Pref: 8% yearly pref with 70% /30% split LP / GP after
Project management fee for value add: 5% of renovation costs for value add

Is this a normal structure or is it aggressive??!? On a $10M deal with 40% equity raised assuming 2 year hold with exit at $13M (assuming you have enough NOI to service interest only debt not to make this complex). That would be $100K acquisition fee day one, $60K * 2 = $120k fee for two years of asset management to be paid each year. Then it would be $13M exit price - $6M debt - $4M equity to get proceeds of $3M. Then 8% pref is $320k for 2 years at $640k which leaves you with $2,360K before 70/30 split. Sponsor has no equity in the deal, is this super aggressive.

Any thoughts on structure in doing one off deals and raising capital from friends and family would be kindly appreciated. Saw this at the shop I just left and it looks mighty aggressive to me but don't have a comparison. I would think the sponsor should put 5 to 10% of total equity in the transaction and potentially a lower pref. My gut also tells me they are able to attract investors by offering a higher pref of 8% to unsophisticated investors who only see $$$ sign due to 8% pref and pitch of 15% IRR.

Comments (48)

 
Apr 3, 2019 - 8:16pm

I follow what your saying, an aquisition fee is market. These guys need acquisition to keep the lights on.

I don't follow this logic though? "My gut also tells me they are able to attract investors by offering a higher pref of 8% to unsophisticated investors who only see $$$ sign due to 8% pref and pitch of 15% IRR." Whats unsophisticated about taking the higher pref?

 
Apr 4, 2019 - 4:43pm

to get investors 15% IRR based on my original post, you would have to get 18-19% IRR at the property level. Some aggressive underwriting with going in and exit cap the same rather than a bump in exit cap rates through 5 year hold with a maybe 2-3 years of 4% growth with expense growth at 2.5%. It's VOODOO MATH! I was at this company for about 8 months and asked questions about their structures and under writing which let me me getting fired. These guys raise money through TECH executives who don't know real estate, pitch them bull shit and due to cap rate compression and outsized rent growth in my market, they have been about to make $$$ the last few years.

The fees look heavy to me but not sure so I am trying to understand what is "market" or what other folks are doing.

I recently put together a business plan to do my own thing. Meeting a lot of folks to talk ideas and trying to figure out what the correct structure is.

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Apr 4, 2019 - 4:51pm

Its not Voodoo math if they were out performing.

Yeah you can give a lot of credit to what has happened recently to cap rate and interest rates going down, but they were still hitting their hurdles.

At the end of the day I don't really follow what the issue is here. Honestly as an LP I would much rather be in a well structured deal in my favor that hits the metrics that a deal that absolutely kills it but wasn't structured in my favor.

 
Apr 3, 2019 - 8:36pm

can't say it's normal/market or even if it makes sense for the deal...but only deal structure ive seen that was truly friends and family involved an entirely separate waterfall/OA from the other JV equity partners. They received a guaranteed % return (which was 3% below the deal pref), for the first three years, paid quarterly non compounded on their equity. After this they would then roll into the normal promote structure if I remember correctly. Because of this the deal had to capitalize/escrow these funds upfront. So basically, irregardless of the property's performance, the F&F partners received a check every quarter at their guaranteed % return. Always seemed odd to me...but then again it allowed the developer to tap into a decent sized equity source that they otherwise likely would not have been able to raise on their own.

 
Apr 4, 2019 - 4:51pm

Interesting structure. Only way the developer can pay 3% below the pref hurdle is by using his/her own funds or it's a pyramid scheme to constantly raise capital. Thoughts?

If or when the market turns, this developer will be screwed while the "value add" deal isn't generating cash flow. Sounds super risky. I prefer a catch up or potentailly letting the investors know that they won't get any dividend for a year or two while we do the development or put in place value add strategy when you are not generating any cash flow. Not sure if I am crazy.

I joined a company where some former TECH microsoft guys said they had a tool to analyze deals in 30 minutes (actually a video on youtube on this buy the cofounder). Turns out that tool is excel and it's an REFM tool with a different output page. Their pitch is we are data driven tech guys and we have made a strong return for our investors but I think they are about to get screwed if the market really does turn.

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Apr 4, 2019 - 4:59pm

what do you mean by 1% and 1%? is that 1% acquisition fee and 1% of revenue or 1% of equity for asset management? the two step water fall makes sense but that might confuse a non real estate "friends and family" hence one tier hurdle might be more ideal in my opinion. institutional would definitely want 2-4 tier water fall structure. thanks

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Apr 4, 2019 - 12:28pm

I know a major company that uses this structure, they raise their money from normal people I would call them more of a syndicator than a true GP with an institutional LP behind them. They also put up 25% of the equity so a 50/50 split isn't that absurd. That being said I think that this structure is pretty fair for what they have to do and the amount of people in the deals that they have to deal with.

 
Apr 4, 2019 - 11:09pm

This is what I've seen, as well. Typically friends and family deals are pretty straight forward. 8% cumulative, non-compounding pref with a 50/50 split after. Pref may be higher in times of market returns being higher. Usually stepping up to institutional money brings in various hurdles on a cumulative, compounding basis with less-generous splits until fairly high IRRs are hit.

For fees, I have been seeing 1-2% for acquisition, maybe 1-2% of EGI for asset management. If it's development, usually 3-5% development fee.

 
Apr 4, 2019 - 8:56am

What kind of deal justifies 1.5% of equity as an annual asset management fee and still allows you to hit your cash flow hurdles? I've seen 1% of EGI as an asset management fee, but the way it's proposed in OP seems egregious compared to other friends and family deals I've seen.

I know a guy who fees up friends and family deals pretty heavily and he does 1% acq, 1% of EGI as AM fee, 1% of sales price as an exit fee. Then he does deal-level equity multiple hurdles, leading to 40-50% of total cash flows from the deal directly to him, before fees.

 
Apr 4, 2019 - 5:11pm

Agree with you on this! Even in a 5 year hold, you are not getting 8% leveraged CoC in year 5 so you are not hitting that 8% pref. It has to be a catch up at sale. These guys have said they pay quarterly and also say they put in their own capital but the model doesn't show they put in 5 or 10% of the capital. Since I left the company, I have been thinking how does the math work to pay the 8% pref...WELL, IT DOESN'T TO ME.

The assholes I used to work for are sketchy owners/syndicators who say on the closing call they have the capital available for a deal but they don't. they have to go and make calls to everyone to raise the capital to close the deal. Also, same guys had no idea what sources & uses or a discount rate was... they just had $$$ and made money so they became real estate guys.

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Most Helpful
Apr 4, 2019 - 2:45pm

Here's our LP JV equity deal we cut which is advantageous to us below. 90/10% LP/GP equity split. Base Capital is pro forma budget peak equity. Additional Capital includes force-majeure and commodity cost overruns funded pro-rata by LP/GP. GP solely funds 100% of all other Cost Overruns. Both parties receive a 12% preferred return on Base Capital and an 18% preferred return on Additional Capital. Development fee equals 3% of total costs, no other fees.

  1. To LP until LP's Cumulative Preferred Return on Additional Capital balance has been reduced to zero;
  2. To LP until LP's Additional Capital account balance has been reduced to zero;
  3. To LP until LP's Cumulative Preferred Return on Base Capital balance has been reduced to zero;
  4. To LP until LP's Base Capital account balance has been reduced to zero;
  5. To GP until GP's Cumulative Preferred Return on Additional Capital balance has been reduced to zero;
  6. To GP until GP's Additional Capital account balance has been reduced to zero;
  7. To GP until GP's Cumulative Preferred Return on Base Capital balance has been reduced to zero;
  8. To GP until GP's Base Capital account balance has been reduced to zero;
  9. To GP until GP's Cost Overruns account balance (up to a maximum of $X) has been reduced to zero;
  10. Next, 75% to LP and 25% to GP until LP has received an IRR of 20%; and
  11. Then, 50% to LP and 50% to GP
 
Apr 7, 2019 - 1:20pm

Is this for a development deal?

This sounds more like institutional JV structure than mom and pop.

Thanks for sharing!

For a multi family deal purchased at 4-5 cap based on inplace rents, after value add strategy is out in place, you are still not hitting 8% leveraged CoC. Adding a 1.5% AM fee on that which is usually before distribution to equity makes me a little confused how a company can pay quarterly 8% dividend!

Spoken to a couple of folks in town since I made this post. Heard of 5-6% pref, 1-2% acq fee and a 65/35 split, no AM fee. This allows them to pay that pref.

The 8% pref I initial described, 70/30 split, 1% acq fee (2% if they take recourse) and 1.5% AM fee seems more like a pitch of 8% guarantee to dumb but rich investors who buy into lower exit cap rate, etc.

Thanks to all of you who responded!!!

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Jun 19, 2019 - 8:22pm

I am a little late here but:

1% acq fee,
1% (of equity) asset management fee,
3% (of EGI) property management fee,
5% construction management fee

Waterfall:
Pari Passu to 9%,
80%/20% to 14%,
75%/25% to 19%,
65%/35% above 19%

 
Nov 1, 2019 - 3:13pm

Man...that's a healthy CM fee. Is it at all subject to cost overruns? I assume such a deal involves a third party GC and not an in-house or affiliated GC shop?

I'm seeing deals where vertically integrated developers (with their own GC) are only getting a 4% GC fee...and no CM fee.

Probably should also ask...is this for new institutional grade development or a value-add acquisition with a remodel?

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