Private Equity Structures
Investor · Member since 2019 · 8 posts · 4 votes
Hey Guys,
My partner and I have experience using private loans to BRRRR SFHs. We are trying to move up into small multi-family and bring on equity partners. Ideally we would bring on one-two investors to cover the down payment and we would take care of property management, rehabs, bank financing, etc.
Has anyone done deals like this?
What kind of split or structures have worked?
Is there a good way to cash-out investors in this scenario and a reasonable timeline to do so?
The properties we are targeting are 5+ units in the $500k-$1m range.
Thanks for your feedback!
Hi @Angus Brooks. I agree you should try to do the JV structure. Go to syndication structure for larger future deals.
I’d recommend about a 70/30 split with all cash investors (including you) getting 70. Take property management fees out. Then put in a buyout provision to buy out all cash partners at refinance or when you hit certain metrics. Say 12% annual return plus return of capital to them. Good luck!
@Angus Brooks for a deal that size you are probably looking at a JV (joint-venture) structure. The only catch is, technically, they need to be active in the deal - meaning they can't just bring the money. If they are assigned a role, then the split is divided evenly amongst the partners. You could probably come to some agreement where the splits skew in either direction.
Setting up a syndication structure (PPM, OA, and subscription agreement) is not cheap, and probably not feasible for a deal this size. A traditional split could be an 8% preferred return and a 70/30 split beyond the pref. This means the investors will receive the first 8% of all cash flows annually, and once it rises about this return, the remaining cash flows are divided 70% to the investors, and 30% to the operators. Keep in mind, if you come up short of the 8% pref, then the balance accrues into the following year.
I think private lending is still a good option for you, where you do the improvements, and refi out of their loan once the business plan is completed, and return their capital.
@Rick Martin Thanks for the detailed response. My reservation with the private loan structure comes down to how quickly I could refinance money out with a commercial loan. Do you have any experience there?
It seems like the JV structure would give us a little more flexibility and mitigate us being stuck in an expensive private loan for longer than anticipated.
In the past we have used 8 month private loans for cash purchases - we have a 6 month seasoning period in our market - so that gives us a 2 month buffer to cash-out. Are cash-out refinances similar with commercial mortgages?
The JV equity waterfall you described sounds like a good option for rent ready holds.
Yes @Angus Brooks I think you pinpointed it - the risk. Large MF business plans aim for 18 to 24 months to complete. I suppose it depends on how heavy a lift you are talking about, and how many units, to decide whether it is feasible.
I am part of a larger team, so no in terms of doing it myself. I've brrr'd some four-plexes, but no private loans on 5+. Maybe inquire with a local bank or bridge lender, on what size buildings they will take on.
Hi @Angus Brooks. I agree you should try to do the JV structure. Go to syndication structure for larger future deals.
I’d recommend about a 70/30 split with all cash investors (including you) getting 70. Take property management fees out. Then put in a buyout provision to buy out all cash partners at refinance or when you hit certain metrics. Say 12% annual return plus return of capital to them. Good luck!
@Angus Brooks I work for a large developer where we are doing deals $40 million+ on multifamily. We always do limited partnership structures.
You would be the general partner (GP), and would bring 3% - 7% of the required equity. You would manage the partnership for a 1% asset management fee, which includes doing all of the legwork from acquisition to disposition and refinances, and accounting. You could also charge an acquisition/ developer fee, usually 2-4% of the purchase price + capex. As the GP, you could hire a property manager and they would charge 3%, or, you could manage it yourself and charge 3%. There are many different ways to structure the waterfall, but typically under this structure there is a level called "promote". Promote occurs when your investors (limited partners or LPs) have received all of their preferred return and capital back. Once you hit the promote, the GP splits the distributable cash with the LP's, usually 50/50, but you can negotiate any split that you want.
The LP's are meant to be passive investors and will require a preferred rate of return (pref). Depending on the nature of the deal, and the type of limited partner investor (high net worth individual vs. institutional partner) the pref rate is usually 6-12%.
Like I said, the pref and promote splits are all negotiable. Also, the type of cash flow and how that gets applied to the waterfall is negotiable as well. I've seen deals where only cash flow from refinances or sales will pay capital balances and pref, while operating cash flow will only pay down accrued pref and the remainder gets split with the GP.
I hope this helps. I'm putting together deals for my company where we use this structure, but I am also using this on my own investments on a much smaller scale. If you have any questions please and hesitate to reach out.
@Angus Brooks I work for a large developer where we are doing deals $40 million+ on multifamily. We always do limited partnership structures.
You would be the general partner (GP), and would bring 3% - 7% of the required equity. You would manage the partnership for a 1% asset management fee, which includes doing all of the legwork from acquisition to disposition and refinances, and accounting. You could also charge an acquisition/ developer fee, usually 2-4% of the purchase price + capex. As the GP, you could hire a property manager and they would charge 3%, or, you could manage it yourself and charge 3%. There are many different ways to structure the waterfall, but typically under this structure there is a level called "promote". Promote occurs when your investors (limited partners or LPs) have received all of their preferred return and capital back. Once you hit the promote, the GP splits the distributable cash with the LP's, usually 50/50, but you can negotiate any split that you want.
The LP's are meant to be passive investors and will require a preferred rate of return (pref). Depending on the nature of the deal, and the type of limited partner investor (high net worth individual vs. institutional partner) the pref rate is usually 6-12%.
Like I said, the pref and promote splits are all negotiable. Also, the type of cash flow and how that gets applied to the waterfall is negotiable as well. I've seen deals where only cash flow from refinances or sales will pay capital balances and pref, while operating cash flow will only pay down accrued pref and the remainder gets split with the GP.
I hope this helps. I'm putting together deals for my company where we use this structure, but I am also using this on my own investments on a much smaller scale. If you have any questions please and hesitate to reach out.
Does a limited partnership fall into the same realm and sec regulations as Syndication and require a PPM?