GP/LP structure - friends and family capital JV structure

yoruba123's picture
Rank: Gorilla | 650

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

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?

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Apr 4, 2019

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

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

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 3, 2019

are returns typically paid out quarterly? Ive seen annual only but then again im on the debt side and dont have much exposure to the equity.

Apr 3, 2019

Actually Id say 90% of the term sheets ive read are paid out quarterly. Cant say Ive ever had an annual payout...some monthly.

Apr 4, 2019

So they were in as Pref equity? all the other partners didn't care that they were lower in the capital stack?

Apr 4, 2019

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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Oct 28, 2019

Depends, more often than not value add deals still cash flow. Its six in one hand half dozen in another and an odd structure but I could see it happening in a one off scenario.

Apr 3, 2019

Would love to work with that structure. That's a pretty good amount of fees.

We've typically used 1%, 1% then 80/20 after 8% IRR. 70/30 after 12% IRR.

I'd suggest if you really are curious about seeing a variety of structures is looking on the crowdfunding sites - can see a lot of deals all at once.

Apr 4, 2019

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

Apr 4, 2019

1% Acquisition
1% AM Fee on the equity in the deal

Which I think is pretty common but I actually don't know.

Apr 3, 2019

From my understanding, the classic "country club" deal is:

90%-95% LP / 5%-10% GP

(1) 8% pref to LP
(2) Return of capital to LP and then the GP
(3) Catch up to 8% pref for GP
(4) 50/50 split thereafter

This does not include any fees that may be collected by the GP.

YMMV depending on the region and the sophistication of the LP.

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Apr 4, 2019

Wow, home run hurdle above an 8% pref sign me up!

Apr 4, 2019

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

50/50 seems too advantageous to GP - I would change to 70/30 or 60/40 but otherwise this structure makes sense.

Apr 8, 2019

This is by no means for institutional capital. This is for <$5M deals where you partner with a couple rich doctors that you met while playing 18 at the club.

Apr 4, 2019

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.

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Apr 5, 2019

I don't understand why any investor would pay 2% of EGI for asset management when the property manager is already getting paid 3-4% of EGI. 1% doesn't even make sense unless the LP is completely passive...

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Oct 28, 2019

Wow 50/50 after 8% threshold is...appealing. Gotta get me into those country clubs.

Jul 23, 2019

This is in line with my experience, except we usually manage to get return of capital to be pro-rata. Scrape together a few $1-3MM commitments from friends and family and toss it in the ole 50/50 over an 8.

Apr 4, 2019

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.

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Apr 4, 2019

Disposition fees are a free grab unless the sale is self performed. That's the broker's job, and developer is already getting plenty of juice on the back-end residual event...

Apr 4, 2019

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

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
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Apr 4, 2019

Delete

Apr 4, 2019

Does anybody has a quick excel of how this would work? I'm having a hard time following.

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Apr 7, 2019

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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Apr 8, 2019

This is for institutional deals. HNW money would have to be really stupid to agree to a 5-6% pref when they can invest in REIT's with the same yield...

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Apr 10, 2019

This sounds like a pref equity deal, not JV, no? GP equity is completely subordinated to the LP.

Apr 11, 2019

We sometimes are able to subordinate while sharing in the residual profit - best of both worlds.

Jun 9, 2019

back in the early 2010's I knew of a developer who did some small townhomes projects. 15% pref only to LP and then 100% over that to GP. GP self performed CM and arch services and didnt charge back to project. They crushed it.

Oct 28, 2019

Sooooo a 15% IO cashflow note?

Oct 31, 2019

Wow that is super risky to the GP if the market turns.

Jun 19, 2019

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

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?

Jun 30, 2019
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Jul 23, 2019