LPs sharing pursuit costs
A trend I'm seeing more and more, especially with larger development shops, is the developer asking the LP to share in pursuit costs, or pre-dev costs. My shop refuses to share these costs and we've lost several great deals to other equity providers willing to come in early and share the costs. I'm wondering if this is a recent trend, considering how much dry powder out there chasing deals, or have institutional shops/PE firms always been willing to share these costs? Also wondering what the typical structure looks like for pursuit cost sharing. Any examples of how the waterfall gets structured when the LP equity comes in this early? does the equity split change when hard costs start funding (developer pays a larger share of pursuit costs before switching to a standard 90/10 split)?
Can't speak for development, but on the acquisitions/value add side we (as an LP) will backstop pursuit costs/hard deposits for deals we like with GPs we trust. It's all trued up at closing.
I see this as the norm. You have an agreed upon budget, then you have the split, now maybe the split for cost overruns is paid more by the GP,
I support the LP paying for as much as possible.
“Love that money!”
We’ve done it on our LP positions and our JV partners really appreciate it. It brings them back almost every time.
If we feel convicted enough to invest $30MM+ in a spec development, the $200K-$300K in pursuit costs (which will be trued up on the backend anyways) is pretty much a rounding error to us, and it is a huge value-add to our JV partner. Lost pursuit costs are baked into our funds expected returns anyways, and you have to been willing to take those risks to be aggressive and win deals.
We usually just write into our cost sharing agreements that if the development falls apart before closing the JV agreement, then the pursuit costs are trued up to a 50/50 split. Additionally, if at anytime in the next 3-5 years the developer pursues the deal with another JV partner then we get fully reimbursed for all of our pursuit costs.
thanks, great ammo for when I try convincing IC that we should be doing this. I can see why it’s a huge benefit to the developer if they’re pursuing several deals at once and their capital is spread thin.
Another question...do you execute your jv docs before you start funding pursuit costs and just amend them if needed, or is there a separate OA for everything prior to closing of the senior loan and final jv docs?
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