Investor · Salt Lake City, UT · Member since 2013 · 4 posts · 1 vote
When doing a cash out refi on a property where the cash out amount is more than the amount originally invested, how do you split the cash out amount between the investor(s) and GP? Would the investors get the full cash out amount, do they get the full amount up to their amount invested and then split the funds above and beyond that, or split the full amount based on ownership percentages? The entity docs leaves it to our discretion, just wondering what the norm is in the industry.
Investor · San Diego, CA · Member since 2018 · 40 posts · 21 votes
4y
@Kyle Barton, it depends on your PPM/LP agreement.
Are you offering a preferred return? Or is there a pre-determined split?
My office typically does 100% to investors until their capital contribution has been returned, then a split for the equity growth. In this scenario, the GP is not rewarding itself until it's profitable.
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
4y
@Kyle Barton, if you repay their investment first, you are treating them as a lender not an equity owner.
I think everything distributed should be based on ownership percentage. I have difficulty imaging any scenarios where I don't think that would be appropriate.
Investor · San Diego, CA · Member since 2018 · 40 posts · 21 votes
4y
@Kyle Barton, it depends on your PPM/LP agreement.
Are you offering a preferred return? Or is there a pre-determined split?
My office typically does 100% to investors until their capital contribution has been returned, then a split for the equity growth. In this scenario, the GP is not rewarding itself until it's profitable.
@Kyle Barton, if you repay their investment first, you are treating them as a lender not an equity owner.
I think everything distributed should be based on ownership percentage. I have difficulty imaging any scenarios where I don't think that would be appropriate.
Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
4y
@Kyle Barton. We often see the cash from a refi or sale going 100% to the LP investors until they have all of their cash back. Anything above that is divided according to the pre-determined split or waterfall.
But it doesn’t have to be this way. You could split it from the start, but you might risk clawback if things go south later. Good luck!
Real Estate Broker · Chicago · Member since 2021 · 108 posts · 23 votes
4y
1) Create a new term sheet that splits up the equity between yourself and your partner in accordance with their percentage of ownership. 2) Decide who will get what type of financing - if one person wants fixed rate financing while another prefers adjustable-rate financing, it's best not to mix them together because they have different risks associated with them; 3) If there are multiple investors, make sure everyone has an updated agreement reflecting the changes in ownership percentages; 4 ) Have a conversation with the person who is going to be taking over the loan and make sure they understand what type of loan they can afford to take on. If you have a partner, make sure you are both on the same page as far as how much you'll need from them after closing; 5) When disclosing your purchase price to an underwriter, disclose it as "the lower of p & l" - this way if there's a discrepancy between your appraisal and your P&L statement or tax returns, lenders will prefer your lower number since that's closer to the actual value of the property.