Syndication/Partnership

30 Replies

I have a high net worth individual that is willing to invest with me and I'm not sure how to structure the partnership. Along with some property holdings, I have a construction/property management company.  We would be after distressed properties in slightly marginal, but rejuvenating areas to add the most value possible. If my investor finances  100% of the purchase and rehab of the property and my company does all construction work, repositions the property, raises rents, and manages the property, what would a fair split be? I was thinking 50/50 split on everything, cash flow and appreciation. Is this fair for both parties? If things go well with this investor we could do a lot of work together, but I want both parties to be compensated. 

I think if the investor is putting up 100% they deserve 75%, and they have everything to lose, and you have nothing to lose just your time, and the investor will need to the lien each property for their protection.



Joe Gore

Thanks for the comment Joe. So do you think if said investor is a first lien holder of the property, would a 50/50 split be reasonable? 

I think it would be a 50/50 if you are putting up 50% of the money. Why not give the investor 75% and do deals.

Joe Gore

Regarding "I have a high net worth individual that is willing to invest with me and I'm not sure how to structure the partnership...." What does your "partner" want? Do they want equity participation? Or is that your idea? One option is for the individual to provide financing only. No equity, just debt financing. This may work out well for the individual since you are discussing buy/fix/hold properties.

Hey Chris, the equity investment is something that I was planning on pushing, primarily because I know he is looking for a tax shelter.  I like the debt investment idea. I think I would have to do a cash out refinance with a traditional bank once the property was repositioned though. This particular investor is looking for something more long term, 5 to 7 years, that seems too long to pay a private investor back at 8-12%. 

@Billy Guyette  If he's putting up all the money, and you're doing all the work, do you plan on paying him back his money with a preferred return and then spllitting proceeds or ?  @Joe Gore FYI, time has value, as does the experience and skills of managing the project, putting it all together, and doing the work. 

The question is, what is the monetary value that each party brings to the deal? What is it that the financial investor is seeking from the deal, and how does he feel it should be structured to meet his goal? It's a balancing act.

Also, there are countless threads on BP on this subject, do a search. 

I have never participated in a JV myself, but you may be able to get @John Blackman  or @Bryan Hancock  to weigh in, as they have experience in JV's, though somewhat different. 

Medium house plansKaren Margrave, Parlay Investments | [email protected] | http://www.parlayinvestments.com | CA Contractor # 680782

To me it sounds like a good debt opportunity, considering that you say "This particular investor is looking for something more long term, 5 to 7 years..." If you can handle paying 8% and the investor will accept that, I'd say do a debt deal and be done with it. My 2 cents.

Thanks for the reply Karen. I'll take your advice search the BP threads for different ways to structure the JV.

There are far too many unknowns here to determine a fair split.  "Fair" is also in the eye of the beholder and really boils down to what you can negotiate.  Things to consider:

1.  How good are the deals found?  Finding an exceptional deal adds a ton more value than finding a decent deal and thus the person providing this value deserves more of the deal

2.  How well can you execute?  If the investor that puts up the bulk of the money can find other team members capable of executing better than you then you provide ZERO value from this perspective.  In fact, you provide negative value because you're costing the deal more than another operator would

3.  Who controls the deal?  It is fine that you're managing the deal, but who will ultimately control decision making and how will cash flow in the project?  This is very important

4.  How will debt financing if any be provided and who will guarantee the debt?

There are probably 100 other things to go through, but at a high level partner-level value worthy of an equity split generally maps to these types of activities:

1.  Supplying debt (lending or guaranteeing in some fashion for credit supoprt) or equity

2.  Finding great deals

3.  Ability to execute

It sounds like from your scenario above that you are presenting that you have number 3.  Number 2 is an unknown.  Number 1 is supplied solely by the other party.

In instances like this it is common to have some sort of preferred equity where the person supplying the capital gets paid back first and is junior to any debt financing.  The person supplying the ability to execute and that is risking their time and expertise gets paid last and is the most junior.  Common splits are 40-60%, but this generally assumes that the operator is supplying the debt.  If you supply zero debt and are risking solely your time it is more common for the money to get closer to 80% of the distributions and the labor to get 20%.

Again, there are too many unknowns in what you have presented to add much value on a message board with comments.  

Medium realstarter2Bryan Hancock MBA, RealStarter | [email protected] | (512) 827‑9638 | https://www.realstarter.co/Home/BH

Bryan, thanks for such a thorough response. I'm very new to this, I appreciate the frankness. 

The investor I'm dealing with is new to the real estate asset class. He would be relying on my expertise in the repositioning process, as we've successfully done a handful in this market. Though we've yet to sit down and go over a framework of how he wants to invest and structure the partnership, he's implied that he wants to leverage the money he's allocated for real estate investments. He wants the investments to be 100% passive, making him a true limited partner. 

I would find the deal, execute the repositioning process and manage the property(s) the entire hold period ( 3 to 7 years).  I wound create substantial  equity and appreciation by buying in an emerging market, rehab, and then raise the rents. My investor would be first lien holder on the property, making his risk no different then a bank offering traditional financing with the property acting as collateral. 

I'm working on two deals now. One is a 12-unit apartment complex the other is an 80 room hotel that I would convert into 35 loft apartments. Both of these properties are distressed, both properties intimidate other investors. The city is pumping money in and around these properties and by all credible forecast, they'll only appreciate in value. So If I can give this investor a passive stream of income (10% preferred interest) and solid appreciation, all secured by a hard asset, then it seems like a 50/50 split would be warranted. 

Just in case anything went south, I hope not but if things did go south what are your plans to repay the investor.


Joe Gore

Originally posted by @Billy Guyette:

Bryan, thanks for such a thorough response. I'm very new to this, I appreciate the frankness. 

The investor I'm dealing with is new to the real estate asset class. He would be relying on my expertise in the repositioning process, as we've successfully done a handful in this market. Though we've yet to sit down and go over a framework of how he wants to invest and structure the partnership, he's implied that he wants to leverage the money he's allocated for real estate investments. He wants the investments to be 100% passive, making him a true limited partner. 

I would find the deal, execute the repositioning process and manage the property(s) the entire hold period ( 3 to 7 years).  I wound create substantial  equity and appreciation by buying in an emerging market, rehab, and then raise the rents. My investor would be first lien holder on the property, making his risk no different then a bank offering traditional financing with the property acting as collateral. 

I'm working on two deals now. One is a 12-unit apartment complex the other is an 80 room hotel that I would convert into 35 loft apartments. Both of these properties are distressed, both properties intimidate other investors. The city is pumping money in and around these properties and by all credible forecast, they'll only appreciate in value. So If I can give this investor a passive stream of income (10% preferred interest) and solid appreciation, all secured by a hard asset, then it seems like a 50/50 split would be warranted. 

Hello everyone. Leo from NY. I am a seasoned Residential RE Developer and broker for over 20 years.  In addition to my business of building homes and rehabbing I manage my personal rental portfolio of a dozen single family homes.

I have an associate like myself that does just residential rehabs. Between the two of us we are averaging approx. 25-35 homes per year, buy, fix and flip.

I am very new to the Syndication process and I am currently familiarizing myself with all of its details.

I have a somewhat similar situation as Bill's and I am tying to get some ideas on my basic bare bones frame work. I would love everyone's thoughts etc.

We currently have working with hedge fund money in NYC.  This is an ongoing relationship for several years.  They provide the debt/financing for the aquistion of each property and we pay them approx. 8-11% on their money, simple debt deal.  In some cases we put up the money for the renovations, other times they put up money for both the purchase and renovation.

He and I where thinking instead of rehabbing these properties, we would transition our rehabbing business into buying and holding these properties for 5 years  +/-  The investor has the money and is willing to make a longer term commitment.  We would be able to acquire a min. of 25 properties per year and should have a min. of 100 by the 4th year.

These are very basic numbers, assumptions and leaving out many details ie; leasing fees, closing costs, mang. fees, repairs, vacancies etc.. Here is my basic breakdown and the #s are after the 4th year (100 homes)

Each property purchase would be approx. $140k, + $20k in renovations ($160k total). Each property would rent out for $2200 p.month;

R/R = $2,640,000 (2200 per home x 100) = 2,640,000

Tax/Insr = $ 980,000 (9800 per home x 100) = 980,000

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NET = $1,660,000 (1383 per home x 100 = 138,300 per mo x 12 mo) = 1,660,000

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YR= $830k to US ($69k per month)

$830k to Investor (69k per month) this give about 5 % return

So we are splitting the Net/Positive Cash Flow 50/50

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SALES Avg. Sale price $320k - $160k = $16,000,000 (Ea. home has $160k in equity x 100)

25% US = $4,000,000

75% Investor= $12,000,000

There a so many questions I have, details I am leaving out, obstacles they we will have and so on..

Sorry for such a long post.. Is my 1st post on BP.

Thanks in advance

Leo

Hey Billy,

As everyone here has said there are MANY different ways to go about this. A lot of it depends on what the investor is looking for.

 Our company in the past has structured deals 50/50% where an investor has put up the equity needed for the deal and we are responsible for the debt side and executing the repositioning plan. This has worked out well and both parties have been happy, as we get the cash needed and our investors get to be a limited partner, so he has no liability and ultimately works for him.

We have also done deals where we are offered our investors an 8-11% preferred return on their money, our group again has secured the debt and executed the repositioning. Any profit above the 8% is then split 70-30% or 65-35% depending what is negotiated.

Up to now most of our deals have been friends and family deals, where our investors have believed in us and although we do talk about various checks and balances in each deal, our group has maintained control over all decisions.

As @Bryan Hancock  noted, there are many different angles that need to be covered and I think the more distance between the relationship the more each party wants to have things, hashed out and in writing.

Our 50-50% investor likes doing things with a handshake, but that's been cultivated over many deals and time.

Do look forward to hear what you end up going with.  

hey Juan, when you said "Any profit above the 8% is then split 70-30% or 65-35%" who is getting what percent of that deal? I am assuming that since you are giving them a preferred return, that you are getting the larger percentage?

@John Moore  , No the opposite actually, the larger percentage goes to the investors. I should have clarified that.

Also, should have mentioned that our group also puts some money into the deal. Normally 5-10% of the total amount needed so that we also have skin in the game.

John, I just sent you a message with my phone number. Feel free to reach out to me any time.

Thanks Juan - I will call you

Originally posted by @Juan Maldonado:

Hey Billy,

As everyone here has said there are MANY different ways to go about this. A lot of it depends on what the investor is looking for.

 Our company in the past has structured deals 50/50% where an investor has put up the equity needed for the deal and we are responsible for the debt side and executing the repositioning plan. This has worked out well and both parties have been happy, as we get the cash needed and our investors get to be a limited partner, so he has no liability and ultimately works for him.

We have also done deals where we are offered our investors an 8-11% preferred return on their money, our group again has secured the debt and executed the repositioning. Any profit above the 8% is then split 70-30% or 65-35% depending what is negotiated.

Up to now most of our deals have been friends and family deals, where our investors have believed in us and although we do talk about various checks and balances in each deal, our group has maintained control over all decisions.

As @Bryan Hancock  noted, there are many different angles that need to be covered and I think the more distance between the relationship the more each party wants to have things, hashed out and in writing.

Our 50-50% investor likes doing things with a handshake, but that's been cultivated over many deals and time.

Do look forward to hear what you end up going with.  

Juan,

I like the way you laid this out so simply, this seem like a very straight forward approach.  On the deals that you are giving 8-11% return on their money, I presume the investors are putting up all or most of the money? Then you are taking 35% of profits, investors 65%.

I am trying to apply your frame work into what I would like to with acquiring 20-30 SFR per year as I indicated in my post.

If I can acquire 25 homes per year at $160k (purch/renovations) = $4M (Investor money) at 8% = $320k per year or $27k per month.

Rent Rolls $2,200  per mo. x 25 = $55k

Investor 8% per mo. = 27k

Taxes/Insur $9,800 per prop x 25 = $245k or $20k per month

Net profits for us = $8k per month

The net profit for us is not much with these parameters, until I get to at least 100 SFR's. But, the back end profits of 35-40% for us would be tremendous given the fact that each home we have will have a min of $160k equity/profits. So on every 25 props they we sell, there is approx. $4M. If we give investor 60% ($2.4M) and we get 40% ($1.6M).

Does my above scenario seem like something that can be done?

Thanks

Originally posted by @Leo Falbo:

Juan,

I like the way you laid this out so simply, this seem like a very straight forward approach.  On the deals that you are giving 8-11% return on their money, I presume the investors are putting up all or most of the money? Then you are taking 35% of profits, investors 65%.

I am trying to apply your frame work into what I would like to with acquiring 20-30 SFR per year as I indicated in my post.

If I can acquire 25 homes per year at $160k (purch/renovations) = $4M (Investor money) at 8% = $320k per year or $27k per month.

Rent Rolls $2,200  per mo. x 25 = $55k

Investor 8% per mo. = 27k

Taxes/Insur $9,800 per prop x 25 = $245k or $20k per month

Net profits for us = $8k per month

The net profit for us is not much with these parameters, until I get to at least 100 SFR's. But, the back end profits of 35-40% for us would be tremendous given the fact that each home we have will have a min of $160k equity/profits. So on every 25 props they we sell, there is approx. $4M. If we give investor 60% ($2.4M) and we get 40% ($1.6M).

Does my above scenario seem like something that can be done?

Thanks

 You are essentially looking for 100% financing (no skin in the game) and giving an 8% pref + 65/35 split.  Not unreasonable if you have experience.  The first problem is your expenses are way understated.  You will have other expenses besides taxes and insurance.  Also the 65/35 split is for profits only, not "equity/profits".  THink about it from the investor's standpoint:  they would put up $4m, get 8% pref, then when you sell for $4m, they take a 35% haircut?!?  Realistically if you sell for $4m, they get $4m and you get 0.

Originally posted by @Bryce Y.:
Originally posted by @Leo Falbo:

Juan,

I like the way you laid this out so simply, this seem like a very straight forward approach.  On the deals that you are giving 8-11% return on their money, I presume the investors are putting up all or most of the money? Then you are taking 35% of profits, investors 65%.

I am trying to apply your frame work into what I would like to with acquiring 20-30 SFR per year as I indicated in my post.

If I can acquire 25 homes per year at $160k (purch/renovations) = $4M (Investor money) at 8% = $320k per year or $27k per month.

Rent Rolls $2,200  per mo. x 25 = $55k

Investor 8% per mo. = 27k

Taxes/Insur $9,800 per prop x 25 = $245k or $20k per month

Net profits for us = $8k per month

The net profit for us is not much with these parameters, until I get to at least 100 SFR's. But, the back end profits of 35-40% for us would be tremendous given the fact that each home we have will have a min of $160k equity/profits. So on every 25 props they we sell, there is approx. $4M. If we give investor 60% ($2.4M) and we get 40% ($1.6M).

Does my above scenario seem like something that can be done?

Thanks

 You are essentially looking for 100% financing (no skin in the game) and giving an 8% pref + 65/35 split.  Not unreasonable if you have experience.  The first problem is your expenses are way understated.  You will have other expenses besides taxes and insurance.  Also the 65/35 split is for profits only, not "equity/profits".  THink about it from the investor's standpoint:  they would put up $4m, get 8% pref, then when you sell for $4m, they take a 35% haircut?!?  Realistically if you sell for $4m, they get $4m and you get 0.

Bryce, I completely understand where you are coming from.  I have ZERO experience in RE Syndications.  I have over 20 yrs as a RE Residential Developer and personally managing my own rental portfolio of SFR's.  Aside from building homes, mang. my portfolio I rehab/flip 10 homes per year.

I have an associate who works with me that does 25-30+ rehab/flips per year on his own. He and I both have access to properties that are well Under Valued. Additionally, he and both have relationships with Hedge fund money that is willing to lend on ventures as such. So he and I have great track records and experience, so paying out 8% and 65/35% is realistic. (?)

Yes I am leaving many things out like; Acquisiton fees, Const fees, Prop mang fee, vacancies, repairs etc.

I think we are bring a huge value to the investors given the prices we are able to acquire these props for? In the end once we sell, what would be fair for us?  I think, 35% of the net profits to us....? Investor is getting 8%, they will own all the assest/properties, we will bring the props to the table, renovate them, manage them and sell them, and they would be getting approx. $2.4M (65%) in their split on back end.  I think given all the work we are doing, our experience and track record with them, a split like that is reasonable?

Again I apologize for my naivete, but I have no experience in syndications.

Trying to realistically figure out the "best" way to put something like this together.  We have the hedge fund investors. We have the most important element in that we can bring much under valued properties to the table. We have the experience in rehabbing, and leasing etc... We do not want to do a debt deal where we are taking financing from them on the purchase of these, we want to use their money, give them 100% ownership.

Originally posted by @Leo Falbo:

I think we are bring a huge value to the investors given the prices we are able to acquire these props for? In the end once we sell, what would be fair for us?  I think, 35% of the net profits to us....? Investor is getting 8%, they will own all the assest/properties, we will bring the props to the table, renovate them, manage them and sell them, and they would be getting approx. $2.4M (65%) in their split on back end.  I think given all the work we are doing, our experience and track record with them, a split like that is reasonable?

Maybe I am the one confused.  Are you buying them for $4m, then selling them for $8m, leaving $4m of profit?   The proceeds from the sale would be applied to returning investor capital first.  Once everything is returned only then would you split.

Originally posted by @Bryce Y.:
Originally posted by @Leo Falbo:

I think we are bring a huge value to the investors given the prices we are able to acquire these props for? In the end once we sell, what would be fair for us?  I think, 35% of the net profits to us....? Investor is getting 8%, they will own all the assest/properties, we will bring the props to the table, renovate them, manage them and sell them, and they would be getting approx. $2.4M (65%) in their split on back end.  I think given all the work we are doing, our experience and track record with them, a split like that is reasonable?

Maybe I am the one confused.  Are you buying them for $4m, then selling them for $8m, leaving $4m of profit?   The proceeds from the sale would be applied to returning investor capital first.  Once everything is returned only then would you split.

we would be purchasing each one for approx $140k +$20k in renov, so each SFR unit @ $160k (not counting closing costs here). When we sell the after an agreed hold period of 3-5 years, each one will sell for approx $320k. $160k goes back to the investor and then we would split the equity 65/35%. So, yes investor gets capital back 1st. The $4M would be for the 1st set of 25 units we would buy. $160k x 25..

we will be targeting for a min of 100 units with a 4yr period.

Am i on the right path with this approach? 

I'll defer to the judgement of more experienced syndicators, but it looks okay to me.  As a potential investor, I would want to know how you are getting your deals (don't have to answer that here obviously), how much equity capture you are getting at purchase, and how you arrive at the 320k sales price.