How to structure private money deal

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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?:)

What is fair is what will sell.  As a sponsor, I would think I am worth more than 20%.  However, most investors will also want to see some type of guaranteed return before I participate.  You might look at an 8-10% preferred return to the equity before sponsor gets anything, and then a 60/40 split of profits.  a 1% acquisition fee is common, as is an asset management fee.  The asset management fee can be a set price/year, but is more commonly a percentage of value.  You could also set it up as a property management fee where you charge a percentage of income or revenue.  Just run the various analyses and make sure you're comfortable looking someone in the eye and telling them you believe it is a good deal.

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).

@Harv Yergin IV The structure is totally up to you. However keep in mind as you said it yourself, this is your first private money raise AND the largest deal you've ever done. The splits vary, I've seen as low as 15/85 to as high as 50/50. Some prefer to go with the waterfall, and some do pref's. It's not going to be one size fits all and it is not always the same for every single deal for the same team. The splits may vary based on each deal details. Normally the splits tend to favor the investors by an early stage syndicators. Also you should run through multiple models to see which one will be beneficial for investors and will help you make a name for yourself with your first private money raise.

At the end of the day, make sure you discuss with the your attorney and follow the rules set forth for the money raise. 

Happy to share more offline. PM me if needed.

@Theo Hicks just to be clear.... The 8% preferred return is 8% of their total cash outlay/investment and NOT 8% of the cash flow after OpX and debt service, correct?