Real Estate Development - Syndication LP/GP Split

To anyone who has experience in syndicating a development or value-add deal...

What were the waterfall splits and terms with investors? If the GP contributes 10% of the equity, that's essentially the purchase price of the land or building correct?

Once construction commences, are the costs split pro rata? LP spends 90% of the construction costs? How does this work once the construction loan converts to permanent? any input would be appreciated. thanks.

 

Generally when you have the "financial close" with an LP, they fund whatever would put them at 90% of the deal to that point, so there is a true-up and the GP gets cash back. This way everybody's money is ticking from the same date. Future draws are split pro-rata, correct. Not sure what your question is with regards to the loan.

Splits / hurdles/ terms are all going to vary depending on the deal and the relationship between the partners.

 
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This depends on the partnership agreement. Sometimes the project GP funds their full contribution before the LP funds a dollar. Other times the project equity contributions are split pro-rata until both parties have funded their maximum base capital contribution, then the loan is drawn.

After the max loan commitment is drawn, any additional costs are considered additional capital which a separate set of rules may apply to based on the partnership agreement. GP and LP equity could split the additional capital calls pro rata or the GP could be liable for 100% depending on the docs. This additional capital is often treated as a separate capital account which may or may not incur a separate preferred return rate and/or take a senior position in the cash flow distribution waterfall.

 

Thank you. My question in regards to the loan is how It’s structured. Can you give me an example of when a partnership buys a ground up or value add deal?

If an existing building is worth 2m and another 1m is needed in renovation, how does the contract price funding work? 90/10 of the equity required correct?

Now if another 1m is needed to renovate and a construction loan is needed, how does that work? Are you saying the 90/10 commitment is made up front which includes the construction costs and all related expenses? Thanks!

 

For a ground up construction deal, a typical loan will max out at 65% of cost, so the remaining 35% is split between equity. This could be 90/10% or might be 50/50%, it all depends on the partnership agreement. For a renovation project, the bank might again max out at 65% LTC whereas the 35% equity fully funds to purchase the existing property at closing and the remaining loan amount after the loan draw at closing is drawn as costs are incurred monthly to renovate/rehab the property.

 

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