Torn over pooling money from friends and family
Investor · New York City, NY · Member since 2015 · 19 posts · 1 vote
Hey guys!
My current partner currently owns 90 units, all multi-fam. He is currently passing up deals because we no longer have any capital. We created a private placement fund and am about to starting asking friends and family for capital.
How should I go about structuring this? We were thinking to just take equity in the deal of around 20-30%. Most of the projects require a lot of renovation. Is an acquisition fee, assets under management (1% gross revenue), and sale/refi fee appropriate here?
I thought cutting ourselves equity was the easiest option, as it provides an incentive for us to make the portfolio profitable. What do you guys think? Would writing a note be easier? We are just looking for capital to fund deals and thought this would be the best way.
@Travis Doyle With regard to raising capital to acquire multifamily assets, consider your cost of capital and let that guide your selection of the best source of funds. Ultimately, the lowest cost source of funds would be the ideal option. While equity financing is considered "expensive capital", it's a common source of funds for multifamily acquisitions. If you can find investors willing to take a note with a reasonable interest rate, that would be a "cheaper" option as compared to sharing equity in the deal with investors. Debt financing secured through a private note may also be easier since it would not require a private placement memorandum (PPM) and subscription agreement, both of which are typical for equity financing. However, with debt financing, if the additional debt service would threaten the viability of the deal (i.e., threaten positive cash flow), equity financing may be a more attractive option. The theme here is that there are many financing options available for your deals, each with pros and cons to consider. A good commercial mortgage broker or community banker may be valuable contacts to help you gain a detailed understanding of the available options.
If you decide to pursue equity financing, a sponsor's share of 20%-50% could be appropriate. Additionally, an acquisition fee (1-2%), asset management fee (1-2%), and sale/refi fee (1-2%) are all common. Ultimately, the economic prospects of your deal and the projected returns articulated to your investors should drive your decision about equity splits, the various fees to charge, and the magnitude of the fees. I recommend working backwards. Start with the target IRR, conservatively underwritten, that would be attractive to your investors. This could range 8-20%; it depends on your investors' goals. From there determine the equity split and sponsor fee(s) that could charged while delivering the target IRR to your investors. You'll need a fairly sophisticated financial model in order to iterate through various scenarios and find attractive options. I use @Michael Blank's Deal Analyzer and it's solid.
Based on your questions, I recommend Chapter 8 of Gene Trowbridge's It's a Whole New Business! for valuable education on various ways in which sponsors structure a syndication.