Currently working on a ground up deal as an LP. Looking to add value to the convos and wanted to see what to look out for as an LP... well versed in waht we need on acquisitions, but what do you guys active in ground-up deals lookout for?
Anyone on the development/GP side, what would your perspective be, and what have you seen your clients ask for that provides them protection?
Appreciate the input
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Conservative LP in ground-up multi. As you probably know, most business terms are negotiated in the term sheet. So best advice is to look at your firm's term sheet and pick out every point that can be tilted in your favor. Below are a few high level points I can think of:
Equity split - 80%/20%, 90/10, 95/5 etc. We like to max out at 90/10 so the developer has more skin in the game. I've seen several try to go 95/5 or even 97/3.
Underwriting fee. Try to get some sort of fee for your group on the front end, maybe 1-3% of your equity commitment with a max of $500k.
You can also try to negotiate the development fee and construction management fee down but good luck.
Waterfall - try to get your pref hurdle as high as you can. We shoot for 10%+. But don't give up too much in the upper hurdles or else you'll be kicking yourself when it's a home run.
LTC - several developers are going 55% LTC. we try to push them to 65% but not higher.
Completion guarantee will have some carve-outs for cost overruns, typically RE taxes, op deficits, interest and force majeure. We've try to get the guarantor to cover as much as possible so we're not on the hook when shit goes wrong.
Plan & cost review, monthly construction progress report and other third party reports - Usually ordered by the senior lender. Ask the senior to piggyback off their reports and get a reliance letter signed.
GC contract - LP usually has the right to review and approve the GC contract. Unless your a construction guy most of this will be over your head. However, if the GC is affiliated make sure to check the reporting requirements for draw requests. Ask for a list of all invoices for every draw. Check the removal rights as well.
Major Decisions - Try to get approval rights for; changes to the plans ans specs, subcontracts over a certain $ amount, cost saving reallocation over a certain $ amount, property management co and contract, draw requests, op budgets, doc modifications, equity calls and sales/refis.
If I think of anything else i'll add.
great insight!
How often do you get this? We charge a monthly maintenance type fee but its only 1000. What is a typical equity check for you guys?
Almost every deal. I was surprised too when I started there. Not every LP shop charges a fee but I think our promotes are a little more favorable to the developer than others so they don't mind paying us a few hundred k on the front end. $10-$30mm
can u explain why GP pays such a hefty fee?
Because we ask nicely.
Our equity checks are similar. This isn't a project cost though like the developer/gc fees right?
I sent you a PM. I would love to see the language you guys have on this.
Thanks for sharing, great post!
Very helpful, thank you!
A few questions... apologies if they're elementary,. i want to make sure I'm understanding correctly.... * What are standard development fees and construction management fees in today’s market? * What does the language behind the completion guarantee look like exactly? “all equity contributed is per the hard cost schedule provided by the GC, except for x% overrun on taxes, etc” ? * What about timing of Dev. Fee payment; like ‘20% at x, 20% at y, remainder at CO’ …? * What do you mean piggy back off the senior; we ask the senior lender to share them with us? Wouldn’t we just ask the GP to send us the reports too, or do we have to make that explicitly in the partnership docs? * What do you look for in removal rights? Anything specific?
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