I was able to bring an off market deal to a couple investors recently. It is a 238 unit apartment complex. The seller is a good friend of mine and is allowing me to shop it for him. I am a licensed real estate broker but I would like equity in the deal instead of commission. I am willing to do what ever is necessary to be of value after the deal has closed. I have never constructed anything like this before but want to learn and "get my hands dirty". The idea I have in my mind for is to ask for 3% equity in the deal. I know everything in real estate is negotiable but is that too much to ask for in a deal? Just looking for a little guidance on how I should structure and where I should start. Thanks in advance!!

@DeShaun Sellers

What is the 3% equity worth? Initially?

Do you understand the legal obligation you’ll have as an equity holder?

Will you have any asset managment responsibilities?

@Reginald Ross  

Thanks for your time. No sir I do not understand the legal obligations. They already have an asset manager. I was told by one party that I would be able to earn my keep through sweat equity. The 3% is worth approximately $630k.

Nice! My thought is you need to do the math on how your portion of ownership impacts the returns of other parties. If they're syndicating, put together a business model and look at how your ownership percentage impacts the returns of GPs and LPs. 

There has been a huge rush of folks grabbing brokers' listings then shopping them around to syndication groups as though they have the property under contract themselves. Assuming that is not the case, you likely have a good case for getting a piece of equity for finding the deal.

@Taylor L. Where should I look to find an idea of business models? That would be some good homework for me. Is that something I need to speak to an attorney about?

@DeShaun Sellers

Equity is great but make sure you get a partnership agreement written up and have your attorney review.

Also, I’m assuming the $630k you referenced is 3% of the TOTAL value of the property.

Since it is doubtful this is a $21,000,000 all cash deal, your equity would most likely be 3% of the *equity* which is probably equal to 20-25% of the total value if your colleagues are financing the deal.

That means your equity would be worth ~$150k.

Make sure you the expectations are set up front as “sweat equity” can mean a lot of different things.

@Reginald Ross Thanks for the clarification! I now have a better understanding of what that means. You are right from what I know a bridge loan will be used in the beginning. 

Ok I will be working on that ASAP to make sure I cover my butt. 

@DeShaun Sellers

Good luck DeShaun! If you every want to ask some more detailed questions, feel free to message me.

I would take 3% commission ($630K) and invest some of it in this deal as a limited partner.

@Nick B. I thought about that too but It makes me wonder would someone be willing to pay that much Commission. I feel like I am adding value by having the relationship bringing the deal but wouldn't that be looked at as being excessive??

@DeShaun Sellers it’s a large asset, so I would assume whom ever you brought it to would syndicate. There are so many ways the deal can be structured, but let’s say it’s a 25/75 split GP/LP, then you might be able to ask for 5% of that 25% GP stake. 

Originally posted by @DeShaun Sellers :

@Nick B. I thought about that too but It makes me wonder would someone be willing to pay that much Commission. I feel like I am adding value by having the relationship bringing the deal but wouldn't that be looked at as being excessive??

Tell me if I am wrong but my impression is that you have direct relationships with the seller. If that's the case you can represent the seller (you are a licensed broker) and charge them a commission.  

@Nick B. Yes sir I do have that direct contact with the seller. I am also the representative for the seller. I wanted to clarify and see if you were talking about the 3% from the buyer side? Because my initial question was about asking for equity in the deal from the buyer side. Assuming it was somebody that I’ve brought to the table.

Why ask a buyer if you can get more from a seller?

Also, if you represent a seller asking a buyer for a piece of GP equity sounds like a conflict of interest to me. That's why I said get paid by the seller and invest with the buyer if it makes sense. 

@Rick Martin I guess being a co-GP would mean better returns (portion of fees and promote on top of the regular returns), though I wonder if the tax treatment will be less attractive. Does being a co-GP mean the distributions are taxed at ordinary income rate, compared to long-term capital gains rate for being a LP?

@DeShaun Sellers depending on the commission amount, you may want to invest only a part of it or maybe all of it (or maybe none). This should be irrespective of the percent, as I assume the valuation will be the same for all the investors.

@DeShaun Sellers it’s fairly simple to set up a limited liability company with different percentages of ownership.

You can even set up different levels of members.

3% ownership of equity = 3% ownerships of Liability in most cases. You could be responsible for Capital contributions going forward, even if you get the 3% for free.

@Tushar P. yes you’re right. Fees get taxed differently, but he being a real estate professional helps him.

Just remember as a limited partner you still have vicarious liability. If the managers of the property go bankrupt then you're going to have to pay up. You could be liable for all of it. However, if this is what you want to do then go for it! There are many pro's to being in a partnership!

Originally posted by @Rick Martin :

@Tushar P. yes you’re right. Fees get taxed differently, but he being a real estate professional helps him.

I thought the tax benefits for real estate professionals were applicable only if they earned very little.

I would probably first negotiate my commission with the seller.  

3% sounds like a full service listing commission, not a limited exposure pocket listing.  My expectation would be more in the 1-1.5% range.   I want to be fair to my seller and friend.

Once that's established,  now I can go to the buyer.  Their PP can be reduced by the amount of your commission for say 1.2x that in equity. Something like that. Cash now has to be worth more than later plus you may not have to be taxed on a large 1099 commission, at least anytime soon. 

If that's agreeable, get representation/help about what that should look like from someone familiar with syndication formations. 

Congratulations on being able to ponder this.  Your network is paying off!