How to split equity and when partnering on a deal

Question

When you have a substantial apartment deal underway and you need to bring in an investor to cover the 20% down payment, and they sign as guarantor of the non recourse loan along with you, what do you typically agree on for terms? Same goes for an owner/seller that is willing to finance the 20% down, what do you offer them?

Matthew Wright · Answer

Right, I guess I'm looking for a good place to meet people to build relationships. Maybe a local landlord association or REA? Thanks Marc!

Matthew Wright · Answer

This is helpful. Now I just need to nail down an investor/partner. I have a couple people in mind that I know, but Id really have to educate them on apartments and really bring an impressive package to the table, i.e. spreadsheets, agreements, breakdown etc. because they have money but theyre not well versed in RE. And this is fine since I need to get used to pitching to everyone, if I want to expand fast. But what Im wondering is, where is the best place to go to find those people that are experienced in apartments, that would without hesitation invest in your deal, as long you brought a real deal to the table?

David Thompson · Answer

Matt,

This can be structured many different ways but if the investor is putting up all the capital (essentially covering down payment, closing costs and renovations budget) then it could be as high as going 50/50 w/the partner.  You are bringing the deal, they are bringing the capital.  The relationship and what this investor can bring to the table on more deals would also be something to weigh.  Is this a one-time thing, then maybe I'd throw out something like a 60/40 or 65/35 split to start.  If this is a partner that you want to grow with then I'm lean more toward being more generous and treat this partner as an equal equity holder so that this person is rewarded well and will likely be there again to fund future deals.  One could argue that 60/40 makes sense to give you voting weight but that can also be accomplished at 50/50 via the partner agreement.  We've had 50/50 partner arrangements before at the GP level where one side has the authority to fire the other (i.e  property manager who brought equity)..its all in how you write it up and the other side willing to work w/you on it.  Get a good legal adviser w/experience in business partnerships.

You can also reward yourself more in the deal through taking asset management fee assuming you are hiring a property manager and that fee would help compensate you for oversight and implementation of the business plan.  You could further reward yourself through performance fees but I wouldn't over complicate it and again, if this is my first big deal and I have a financially strong partner, I'd take a balanced approach and even err towards being generous if you are looking long term.

Eric Marofske · Answer

It is more dependent on the seller than the market; if it makes sense to carry a note based on the seller's financial needs/goals at the time, then the option becomes viable.

Again, the actual terms of the financing are negotiable.  You could start with I/O, or 2-3% and a longer amo period, then meet somewhere in the middle.

Matthew Wright · Answer

I found that banks that would allow Seller financing of the 20% didn't seem to care term specifics, so long as the term wasn't longer than theirs. Does this sound right?  I'm thinking 7-8% and 5 year term with 20 year amortization for seller 20%. Have you been involved with this type of scenario? Do you find it common in your market when it comes to destabilized apartment buildings with tired land lords?

Eric Marofske · Answer

There is definitely opportunity to get creative when financing/funding a deal.  A common equity structure is to offer a fixed preferred return with a split of excess CF.  Generally, you would look to give up as little as possible while still providing a return that is acceptable to investors.   If the numbers don't make sense on yours and the investors' side, then the deal won't move forward.

Regarding a seller carry, the terms in question will be the loan amount, rate, term and amortization period, each of which is negotiable.  There's no standard here and, again, will depend on finding a balance between what works for both you and the seller.

Carson Jones · Answer

I don't know if there is a typical. Are you just finding the deal? Is there value add that needs to be done? Are you going to manage the property? I know people where the person funding the deal owns it, the other person manages the property and does all the work and once the initial investor has their principal returned from cashflow, the equity is split 50/50, but I think it's completely open to negotiation.