How to structure private money deal

[Harvey Yergin IV]

We are looking to sponsor what will be the largest deal we’ve done to date. We will acquire a commercial loan and raise the downpayment plus CapX from private money investors. This will be out first private money deal and I’m curious on best practices for structure. 80% for investors and 20% for sponsors. This share includes both cash flow and equity. Questions: -Is this a fair and simple structure - Do these plans usually balloon after a given term (ie 5 years) - Are we within reason to charge an acquisition fee and ongoing asset mgmt fee? If so, what percentages are typical for these fees? - Do you have a pitch deck template that you wouldn’t mind sharing?:)

[Theo Hicks]

Hi Harv,

The typical structure between the sponsor and passive investors is an 8% preferred return and a 50/50 of 70/30 profit split. That is, the first portion of the cash flow (income - operating expenses - debt service) goes to the passive investor - 8% of their investment. Any cash flow above the 8% preferred return is split 50/50 or 70/30. When you sell, the remaining sales proceeds after paying back the loan, closing costs, and returning the investors' equity, is split 50/50 or 70/30. 

Usually, you continue to pay the preferred return until you sell, unless you have "debt investors", in which case, you will pay a fixed interest rate for a set number of years, and at the end of the term, you owe them all of their capital (which you do through a refinance, supplemental loan, or sell.).

Acquisition fees and asset management fees are also typical. Standard acquisition fee is 2% of the purchase price paid at closing and asset management fee is 2% of the collected income (paid either before or after the preferred return - your choice).