Deal structure fair?

[Charlotte Dunford]

Good evening. Below is a scenario for a syndication deal. Would you say the following ownership/profit split structure is fair? Should I share the acquisition fee paid to me with my operative partner? How would you change it?

Equity structure:

20% - equity raising general partner (me)

20% - operative general partner/loan guarantor (loan guarantor, credit partner)

60% - LP equity (investors)

Returns:

12% preferred return to LP's

Fees paid to the equity raising GP (Me):

5% acquisition fee

3% asset mgt fee

[Phil Christian]

Originally posted by @Charlotte Dunford:

@Phil Christian it's a 12% cap, $2.75 million, 90 unit mobile home park deal. It's not particularly high risk. I do realize that 12% might be too high. For a deal like this, what should the preferred return be?

Also to answer your question, the deal structure is to give LP's the preferred return, and then split the left over profit 30/70 or 40/60. Me being 30.

If it was a $2.75m apartment deal this is how we would underwrite it. 

GP 5%/ LP 95% (Institutional equity wants to do 10 / 90)

1.25% Acq Fee

3% Asset Management is fine

70 / 30 after a 6% or 8% (institutional equity would want 10% but settle for 8%).  You can add additional hurdles, say after a 15% goes to 60/40, etc. 

Obviously, I don't know your deal so 12% pref might work if you confident you are hitting 20%IRR and you need a big pref as a carrot to attract equity. If you are not hitting a big IRR you might not be too happy with your returns compared to your equity in the deal and the amount of work you put in the deal.

If you are new to sponsoring deals... push the pref down to 10% and get focus on the deal and use this one to get better terms with on the next.