Structuring partnerships in multifamily

[Erik Pfundstein]

Hi All,

I have a few questions regarding partnerships in multifamily...

Lets go by this scenario:

Lets say we are looking at a 20 unit. Value add. Refi, and hold for long term. If i have a partner who is going to be similarly as involved as i am(very active), but is putting up 40-50% of funds, and another partner who is very minimally involved mostly just a money partner but not completely silent/passive but also putting up 50% of the deal. Lets say i am planning on putting 1-10% of total capital raise for purchase.  The capital mentioned above would be for down payment, 6 months expenses, renovations, capex reserves as required by lender... 

how would or could this partnership be structured? How about in terms of repayment/interest for the amount of capital invested, equity split, etc. If there are no passive investors this is technically not syndication, correct? I am trying to figure out what is the most common and appropriate approach. A Refi- And roll (rolling capital to next deal) strategy is what we are hoping to acheieve. 

[Chase McArthur]

@Erik Pfundstein

The answers you get will vary from person to person, but IMO a waterfall needs to be structured with defined hurdle rates. If you are investing the least money with the heaviest workload then a structure should be built that requires you to work for your returns, as you are taking the least risk.

The splits will have to be agreed upon between you and your investors. As I am not financially involved in your deal I don't feel comfortable telling you how to structure that.

Personally, the smaller your investment the larger your hurdle with a caveat, you should at least get a minimum return that is in line with your initial investment. However, if you are going to be the one managing the bulk of the deal, a managment fee should be included in your structure that is seperate from your waterfall.

Also, the overall investment strategy needs to be considered when developing the dynamics of your deal. You need to establish the entire life cycle of the deal from acquisition to disposition. Very often the bulk of the time and energy is spent on the acquisition with very little being spent on the divestment strategy. Develop the entire horizon as well as contigencies.