Equity Splits, Structures And Returns

We structured as a 6% preferred return to our investors and then a 60/40 equity split, but what we've done is our cash flow is not being considered. Return of capital is being returned on capital so that equity split upon sale will only happen once they've received back at style 100% of the initial investment. This is a big reposition deal, we wanted to make sure that investors have made a 6% return on their money before any split takes place. So they will have a six percent preferred return and then the cash flow will be enjoyed up until the sale. And then at the sale, they will receive 100% of their initial investment back and then we do the equity split there off there. So, there's a lot of pressure on us to perform. 

While we are holding the asset, we will do a 6% upfront to the investors and then the rest of it is split 60/40 with no pressure. And then at the end full return of initial capital and the split there off the deck. So this deal, given the amount of time, effort, a resource we had put in, we've put in three points on acquisition to a 2% asset management and zero disposition, zero refinance. I'm going to give you a little tip, I keep on saying this is a business and we're trying to take care of our investors and this is one of the ways that we started to align with our investors. We do an acquisition fees upfront, I can't be performance-based. 

One of the things that we started to do with our asset management fee and then our disposition fee, we don't charge a refinance fee because it's a little bit harder on a performance basis on that to be able to calculate the way I'm going to tell you, but what we do at the asset management fee is that if we can't at least hit the preferred return, then we don't take the asset management fee. And the reason why we started to do that is that I've been personally inside of some syndications where we have not hit the preferred returns, but then the sponsorship team was still taking the asset management fee. And to me, I feel like that's a misalignment of interest, I would rather as a syndicator want to make sure my investors were taken care of first. So we always make sure that the investors get their return first and if they're anything over on top of that, then we'll provide that asset management fee. And then it's performance-based there as well. 

We typically do a 1% but we base it off of the original projections, meaning if we project an original 16% IRR on our hold period, if we don't hit at least a 16% then we are not taking that disposition fee. But if we can outperform the property, we'll take that disposition fee before the rest of the cash flows are split. And that way it doesn't actually affect your numbers when you're trying to calculate your rent, your underwriting, anything like that. You only have to calculate in it at all cause it's all after your projections and you just put it into your operating agreement, that's how it's split. 

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