Structure for $1m+ Multi-Investor Value-add Deals?

8 Replies

Can someone provide a brief outline of a typical structure for deals where one experienced managing partner puts together a deal and takes on a number of investor partners?

I ask because I came across a firm offering deals like this:

  • Purchase, rehab and flip a distressed property, timeline 6-18 months.
  • Minimum Investment $100,000
  • Above $500,000 and an investor can appoint a member to the management board
  • Minimum asset price $1,000,000
  • Management Fee: 2.5% of invested funds
  • Management invests 10% alongside investors
  • Developer invests 10% alongside investors
  • Success fee of 50% on returns above 8%

My main question is whether the 50% success fee on top of the management fee is highway robbery, or pretty standard on larger deals averaging 30%+ in such short timeframes?

Is there a standard, by-the-book formula most use?

Way too comlex.  Keep it simple.  There are basicly 3 divisions, or roles to fill here.

1 - Managing Partner

2 - Cash Partner

3 - Credit Partner

...and the cash and credit partners can be combined to become the Finance Partner.

How it gets divided depends on the type of deal it is...and negotiations.

Typically, we will split it up this way:

Manager = 40%

Credit = 40%

Cash = 20%

...if there isn't a credit partner (all cash deal), that 40% is split 20/20 between the other two...with the understanding that if a credit partner is needed, that 20/20 is given back to the credit partner.

Agree with @Joe Villeneuve that that structure is rather complex. Waterfall structures, with hurdles to be met by the Sponsor, are nice to see for more investor/Sponsor alignment. An example may be as follows:

100% to investors up to 8% preffered

Then, 80/20 split up to a target IRR (maybe 15-20%)

Then, an even 50/50 split thereafter.

First, the Sponsor receives zero dollars if the asset doesn't perform. Next, the Sponsor is rewarded for the asset performing very well with the 80/20 and 50/50 split.

@Rob Barry there’s really no one-size-fits-all structure. It varies by sponsor track record, amount of heavy lifting and the risk.  For example, the profit split on a ground-up development deal would be much different than what you’d expect to see on a plain-vanilla cash flow play. 

They can also range from the simple (like a straight 50/50 split) to the complex (a preferred return with several waterfall hurdles and other oddball provisions).

For typical Multifamily value-add offerings terms should be somewhere similar to the one we typically use:

  • 8% preferred return (investor gets 100% until reaching the 8%) then
  • 70% of the profits until reaching a 12% return, then
  • 60% of the profits until reaching a 15% return, then
  • 50% of the profits thereafter

These can slide around somewhat, with slightly higher or lower preferred return, and/or the % profit splits might vary (such as 10% higher or lower than above) or the hurdle rates can vary. 

More important than the structure, however, is to take a deep dive into the sponsor's financial projections and their historical actual performance versus their projected performance. What you are looking for is whether the IRR forecasted is likely to be achieved.

In other words, let's say that two groups have offerings with the same forecasted IRR. If you only look at structure, you might be tempted to pick the one with higher splits. But if their projections are too rosy or they don't have a track record of achieving their projections, the higher splits don't mean it's a better option. It might just mean that they have to offer higher splits to attract investors because they can't attract them with their actual performance.

@Joe Villeneuve @Michael Bishop @Brian Burke    - Thanks so much for weighing in. So it doesn't look like charging a % of invested assets on top of a % of the profits is standard. But considering the average returns from the last seven deals 40% (pre split) in 5 months, I think I may give it a closer look.

Do any of you have experience investing with international entities? I know in the U.S., recourse is as straightforward as enforcing the contract language upon a legal entity. In Spain, I'm out of my element. Any pitfalls to watch out for?

Originally posted by @Rob Barry :

@Joe Villeneuve @Michael Bishop @Brian Burke   - Thanks so much for weighing in. So it doesn't look like charging a % of invested assets on top of a % of the profits is standard.  

It’s common to see some level of fees.  For an income property you usually see a fee calculated off of a percentage of income.  For a development project you are more likely to see the fee calculated as a percentage of either the equity or a combination of the debt and equity.  It’s also common to see an acquisition and/or disposition fee which are typically a percentage of the puchase and sale price.

@Brian Burke makes a good point with the acquisition/disposition fees.

@Rob Barry keep in mind that this does not affect YOUR bottom line (relatively speaking). The numbers you see in the deal deck/initial projections take these fees in to account when estimating investor returns.

Originally posted by @Rob Beardsley :

@Brian Burke would you agree that it is better to under promise and over deliver then?

Absolutely! I look at it this way: if your forecasts project a 14% IRR and you deliver a 15% IRR, your investors will invest in future deals and refer their friends. But if your forecast was 16% IRR and you deliver that same 15%, you are one of those guys that doesn't do what you said, you'll lose investors and their referrals.

So while it’s more difficult to recruit investors when your projections are conservative, it’s much easier to retain them.  Perhaps that’s the difference between guys like me who have been doing it for decades versus some who are one and done. 

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