Syndicating as co-GP. Am I asking too much to JV w/ my investor?

Question

I have an interesting deal on the table to join a pretty significant multifamily syndication as a co-GP for 1,000+ units at a price tag of $130m+. Financing is in place as is an institutional equity partner. My position would be to raise the remaining equity of roughly $10-15m, which is about 12% of the total deal size. In exchange, I would come in as co-GP and get a small share in the sponsor promote in the equity structure in addition to a small share in the fee structure on the acquisition side.

I have a couple of investors where most, if not all, of the raise could come from. However, I'm thinking through how to position a possible JV with my investor so that I get in on his side of the LP deal and essentially get a larger share in the equity structure outside of the sponsor promote, OR is this asking for too much since the LP is bringing all of the capital to the table?

Also, in a syndication of this size, what are best practices to ensure that my small interest is not squeezed out in a capital call?

I guess my interest in a JV with the LP is to add more protection for my small share in the event of a capital call.

Greg Dickerson · Answer

It would not be appropriate to ask an LP investor JV with you or share their returns with you in a deal where you are on the GP side and are asking them to invest. It would be appropriate the other way around where you offer the LP the opportunity to be on GP side with you especially since it sounds like they are bringing close to half the equity required.

One thing to watch out for on deals like this is the capital stack. Some equity funds look for opportunities like this as they will take over and wipe out the LP investors if the deal gets into trouble.

Also If there is a cash call and you can’t answer the call your shares will be diluted as will the LP investors of they can’t answer either.

Chris Salerno · Answer

Congrats on finding a great deal!

I would highly recommend contacting another SEC attorney to answer some of your questions.

Be sure to read the PPM very closely to ensure the capital call and what that entails. From my experience when speaking with some equity firms. They like to have their attorneys draft up the PPM. I know of a couple that will let the JV partner do it and they overlook it. I would just make sure your SEC attorney is explaining it very thoroughly to you.

Good luck!

Michael Ealy · Answer

Hi Fabiola,

First off - congratulations on getting yourself a part of a BIG deal like this. Awesome!

Second, about getting a share of your LP share: my advice - DON'T. You want your investors to have a great investment experience with you. You are getting a good chunk of the equity at 12% - which reasonable specially since you're not bringing anything else to the table (I am assuming), other than raising part of the equity.

By giving your investors (LP) a good chunk of the equity, if the project does well - better or as good as expected, they will make a good return on their money and they will reinvest with you. If the project does poorly or well below expectations, by giving your investors a good chunk of equity, they might still breakeven (and might still reinvest with you).

However, if you "nickel and dime" them on their equity and the project does poorly, they will most likely lose money and not reinvest with you.

Third, on how to ensure you have enough equity (or protect your equity position) in case of a capital call - well, you can't protect that AFTER the property is acquired. You can protect yourself and your LPs by ensuring the deal you acquire is a great deal. In today's market, a good deal is not enough. It has to be great - 30% IRR or better. Why? As cap rates decompress, marginal deals (15% IRR or less) will likely lose money and your investors (and yourself) will get hurt in the process.

Makes sense?

Alina Trigub · Answer

@Fabiola F.

If you're planning to bring a significant equity into a deal, you can set up your own fund and enter the syndication with a single check. This will also cover you from a legal standpoint. As @Bryan Hancock stated, if you're just bringing funds into a deal, you need to be a licensed broker. The alternative is to have additional responsibilities in a deal. Anyway, this is just an opinion. At the end of the day, you have to consult with a securities attorney. There're a few on BP.

Also, in terms of your earlier question on capital call, it must be fully disclosed in the PPM.

Best of luck!

Scott Mac · Answer

Hi Fabiola,

Off the cuff, it seems like this might be addressable in the operating agreement--Although the institutional equity partner might be calling the bulk of the shots in some areas of the deal in a very rigid structured manner, leaving you with little wiggle room (or maybe not).

If this were mine, I'd be speaking with a experienced syndication attorney about how to handle this whole thing.

This seems like a golden opportunity for you--Congratulations!

Good Luck!

Greg Dickerson · Answer

You can ask to address that in the operating agreement but chances will be slim they will grant your request since it’s their deal unless they really need you and your investors.

David Acosta · Answer

I agree with much of what has already been stated above.  A sub-syndicate, or a "sidecar" seems to be what you're looking for.  Your fund (which you have equity in) would invest in the syndication as an LP.  Your active role with the other sponsors, and ability to place capital, would give you the equity on the GP side.

Legally, there are added layers and components that would have to be set up correctly with the SEC.  Primarily, setting up and structuring your fund.  Your main push back here will be, why invest in your fund instead of the syndication directly.  Ideally, you'll be providing them an opportunity they wouldn't otherwise have access to.

Best of luck moving this forward!  Sounds like you have a great opportunity.

Luke Miller · Answer

@Fabiola F. there is a lot of unknown information so i'm going to make some assumptions. It sounds like you're looking to sub-syndicate so you can share in GP profits as well as taking a fee for placing the investors into the opportunity. I've seen some syndicators take a 1% fee (or so) for placing capital into their fund to then place into the syndication. There are significant drawbacks to this though so make sure you talk to an attorney and an accountant. Specifically, I think you would need your own PPM and would need to distribute K-1s. I'm not sure on these because i've never done a sub syndication.

Adrian C. · Answer

@Fabiola F.

I have a question on this...and sorry if there is something I'm not understanding correctly.  If you want in on the LP side with your investor, why not just form a Manager-managed LLC with your investor as a member and then put your own capital into the deal on the LP side?  You can use your own operating agreement to handle cashflows from the GP share or have the sponsor pay those funds out to you directly (or another entity if you have one) while the "LP cashflows" come to your LLC.  I have recently used this same sub-syndication structure and it works well...you can use your OA to dictate the terms with you and your investor, including events surrounding a capital call if your investor cannot or doesn't want to answer the call (assuming your agreement with the main sponsor gives you this option).  This structure allows for great flexibility without getting the main sponsor involved.  Was your intention of the JV structure to not invest your own funds?  If so, I agree with the above comment that is probably a bit much to ask.  The only fair way to do it I think is to cut them into the GP side as was suggested before.

I have done a sub syndication using an LLC and I'm happy to pass on the info of my SEC attorney if you send me a PM.

Bryan Hancock · Answer

From the way the thread is presented it doesn't sound like you have any other material participation in the project other than to raise capital.  Is this the case or are you going to provide actual viable significant participation in the project?   I'd definitely speak to your legal counsel about this point specifically if you're unregistered.

Regarding the proposal I tend to agree with Greg Dickerson's response above.

Syndicating as co-GP. Am I asking too much to JV w/ my investor?

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