What % of the equity are GPs putting into deals these days? Whats the minimum?

My buddy at a real estate IB said that around 10% is normal for GPs to be putting into deals, but I just wanted a sanity check on that. Would 5% be considered low for a new-build boutique hotel?

Comments (11)

Feb 6, 2019

Yes, 5% would be low for a boutique hotel. For small to medium sized projects, LPs are looking for 10%-25%. For larger deals, 5% seems OK, but not too much lower.

Feb 6, 2019

Multifamily here. 95/5 and 90/10 are both pretty typical.

Feb 6, 2019

We usually like to see a minimum of 10%. Anything less can be problematic when: (1) The GP's equity can be recouped via fees and (2) if the GP is contributing land, they are contributing it at a stepped up basis, which means they have even less equity in the deal than what the JV Equity agreement states.

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Feb 7, 2019

How much equity do GPs typically put in a deal when contributing land with a stepped up basis?

Is this a smarter approach? Any other solutions when the value of land has appreciated, yet GP doesn't want to contribute land?

Feb 6, 2019

On a development deal, an LP will still likely expect the GP to contribute between 10-20%.

What do you mean by "is this the smarter approach"?

From a GPs perspective, they would like to contribute the land into the Joint Venture at the highest stepped-up value possible.

Assume the following:

  • Total Project Size: $100M
  • Construction Loan: $60M
  • JV Equity: $40M (90/10 Split)
  • LP Equity: $36M
  • GP Equity: $4M

Now - assume that 24 months ago, the GP purchased the land for $2M. After obtaining entitlements and associated pre-development work, they contribute the land into the Joint Venture for $8M. By doing that, the GP will have a capital account balance of $4M and then have $4M returned to them. Therefore, the GP will have a 10% interest in the JV AND will have $(2)M (aka $2M of profit) on their internal equity.

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Feb 7, 2019

Thanks for the breakdown. Very helpful.

I just can't wrap my head around the 2m profit part.

How do they take this 2m unrealized gain?

Above comment says GP has less equity in the deal because of this.

Most Helpful
Feb 6, 2019

Think of it this way. They bought the land for $2M and contributed it to the joint venture at $8M. Think of the contribution as a pseudo-sale of land to the joint venture. Thus, their contribution ("sale") generated a profit of $6M. Of their $6M in profit, $4M goes into the venture and $2M is returned to the GP.

To answer" how do they take this $2M of unrealized gain", it is paid by the new equity + the construction lender. It would be the same as if they were purchasing the land from a third-party. However, in this instance, the seller is the GP. The "pulling out" of equity only works if: (1) the land is being contributed at a stepped-up basis and (2) the required GP capital is less than the value that the land is being contributed at.

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Feb 6, 2019

Yeah, I'm a day or two away from being under contract with a buyer on a 30 unit value add deal. Well known equity player would go 90/10 or 95/5 on this deal.

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Feb 6, 2019

You talking absolute minimum? We've done deals with a GP buying in at 50 bps. I'm pretty sure they syndicated half of their equity to another shop too without telling us

Otherwise 95/5 is more common and occasionally 90/10 for ground up dev

Feb 7, 2019

It honestly depends. For new development projects in general, you'll be extremely lucky to find an LP, or even a lender sometimes, willing to let you in at less than 10% equity. For existing assets you can go a LOT lower than that. It's a question of risk. If you are developing a new building and everything goes to shit, you as a GP might find it makes more sense to just walk away from the project instead of pouring more time and money into it. Limiteds and lenders want their general partners to have a lot of skin in the game so this doesn't happen.

If you've got an existing, cash flowing asset, that risk isn't there. If the GP is acting negligently or runs into trouble, the LP has a lot more options to step in and save the asset. It's still cash flowing and still there, so even if you get tied up in the courts its not killing your ROI. Contrast that with a lawsuit shutting down a new development project for two years when you're not even topped out - that is a disaster for that deal.