Fair Equity/Profit Splitting in Syndications

[Jacob Cytrynbaum]

Hello! Hoping to get a little clarity on this issue. Obviously have not done this before and want to be really clear on deal structure before I start so I don't unintentionally screw investors or myself. 

Suppose I syndicate a deal with the following terms: The GPS gets 20% equity+capital they contribute. Investors get 8% annual preferred CoC, then 70/30 profit split up to 12% CoC to investors, then 50/50 thereafter. I expect the building to be cashflow positive each year (not a new development or big value-add project that would take a year or two to cashflow and returns only show up when the building sells).

1. What happens when I sell the building--do I count the money investors have already been paid when considering how to split profits on the sale? Obviously I ensure they get their capital back first and foremost. 

2. What is the point of taking that 20% equity if I have already predefined the profit-split? Is the point that I am double dipping, i.e. that the GP participates as an LP with 20% equity then also gets the bonus waterfall splits? Or do I have that wrong?

Really appreciate any input you all have

[Greg Dickerson]

Originally posted by @Jacob Cytrynbaum:

Hello! Hoping to get a little clarity on this issue. Obviously have not done this before and want to be really clear on deal structure before I start so I don't unintentionally screw investors or myself. 

Suppose I syndicate a deal with the following terms: The GPS gets 20% equity+capital they contribute. Investors get 8% annual preferred CoC, then 70/30 profit split up to 12% CoC to investors, then 50/50 thereafter. I expect the building to be cashflow positive each year (not a new development or big value-add project that would take a year or two to cashflow and returns only show up when the building sells).

1. What happens when I sell the building--do I count the money investors have already been paid when considering how to split profits on the sale? Obviously I ensure they get their capital back first and foremost. 

2. What is the point of taking that 20% equity if I have already predefined the profit-split? Is the point that I am double dipping, i.e. that the GP participates as an LP with 20% equity then also gets the bonus waterfall splits? Or do I have that wrong?

Really appreciate any input you all have

The GP would not receive any equity unless they invest in the deal themselves. Upon sale the preferred return is paid first, initial capital from investors is returned second then remaining profits are split accordingly.