Let's say a real estate private equity firm called Blue Estate LLC had $1BN AUM. 80/20 split, 1% acquisition fee on purchase price, 1% disposition fee on sale price and 1% asset management fee from revenues.
Response OK.
Let's say they raise $25m from investors in Blue Estate Equity Fund I to purchase a $100m apartment building and hold title and $75m financing in Property I LLC. 6% cap rate so $6m NOI and also assuming 50% expenses on revenue of $12m and interest only rate of 4.5% so annual debt service is $3.375m so distributable cash after debt is paid is $2.625m so a 10.5% cash on cash return. $2.1m (80%) is paid to investors and $525k (20%) is paid to sponsor(s).
Response FYI you are budgeting an interest only debt which is doable for a few years but Year 4 or Year 5 it will probably P & I. So your math is correct based on those assumptions.
Upon closing of the property is $1m (1% acquisition fee) paid to Blue Estate LLC?
Response yes you could do that.
Response It seems you are making Blue Estate LLC the manager of Blue Estate Equity Fund 1
Upon sale of the property let's say for $110m is $1.1m (1% disposition fee) paid to Blue Estate LLC?
Response yes your could do that
Each year is $120k so $10k per month (1% asset management fee from revenues) paid to Blue Estate LLC?
Response yes your could do that
So let's say I solely own Blue Estate LLC and I hire employees to work for Blue Estate LLC to help our such as a director of investors relations, CFO, portfolio manager etc.
Response OK
I then form Blue Estate Equity Fund I with Class A and B membership interests with Class A having no voting rights, 80% profit rights and being sold to investors and Class B having 100% voting rights, 20% profit rights and being owned by Blue Estate LLC.
Response Correct
Does it make sense to pay management fees to Blue Estate LLC so that I can cover expenses such as salaries etc and hire sponsors etc.
Response that is technically already happening you are getting 1%, $120k. So you might need multiple properties so this way you have $500k or whatever to cover your overhead.
I plan to set up my own real estate private equity firm one day so I want to get the whole structure figured out, do you agree with my structure proposed above?
Response it is doable but I prefer to follow the KISS method. It might be just easier each property has its own llc and sell this shares. As what you want to do is raise a a large amount of money, and might be what is considered a Blind Pool as you want to raise the funds first then find the asset.
I know I may have gone into a lot of detail but you know I learn with examples.
I highly appreciate the time you take to read this and your feedback is appreciated.
