Best books on RE Private Equity?

Question

So Im working on organizing a real estate private equity deal and its getting a bit more complicated than I think it should be, but I need to understand all possible structures and figure out if what the GP is pitching is unreasonable.

So reading up on some real estate PE books would be great. Which ones are good?

The GP wants to have one LP investor as apparently multiple investors would cause the lending banks to reduce the leverage ratio on the properties (not sure how much in actuality that should matter, if the LP’s are well capitalized), as well they want to structure the deal so the LP gets paid back in full first, then all cash flows and the assets are split 50/50, and to get an interest free loan from the LP so the GP could pay taxes on the phanton income they aren’t actually taking out of the business.

It seems more complicated to me than a waterfall with a traditional structure. I dont love the idea of the LP kicking in anything as a loan to the GP, and I don’t think the potential LPs I know will either. I dont want to present the structure to them until I’m fully comfortable with it as someone arranging this potential deal.

If they look at a first proposal and think “wtf is this?!?” then the odds of them coming back to negotiate are low. I also think 50/50 seems way too generous to the GP. Average LP/GP splits end up being 73/27, per my research. So 50/50 is almost double what a GP would make in an average deal.

Christina Dillard · Answer

Link for “ Investing in Real Estate Private Equity: An Insider’s Guide to Real Estate Partnerships, Funds, Joint Ventures & Crowdfunding" by Sean Cook

Christina Dillard · Answer

https://a.co/4L1NzrL

Ray Johnson · Answer

@Anders Jax It sounds like you're raising funds for the one Hotel deal that looks like a JV, and additionally comprising a fund for future deals, Is that correct? Will this fund be participating in the Hotel deal or is the Hotel deal completely separate?

There are many ways you can  do this, @Brian Burke may be able to provide some insight since he's written many post on this topic. The role of the Asset Management company will be the major point.

Anders Jax · Answer

@Enrique Huerta

I would say I’m just a finder. I’ve put together research, analysis, and am finding the investors.

This is the one GP i am doing this for.

I just dont want to bring a structure to a bunch of very sophisticated career investors thats like hey, pay double market rates for management, personally guarantee the debt, take 1/3 less cash flow than a usual deal, and get back to me!

I think a private equity managing director would be like f*ck are you thinking man?!? But this isnt my expertise. I just have participated in some small stuff and read a book on this stuff.

The thing is its just not a JV. This is a passive investor and an active GP who also is the asset management company through their management arm.

Enrique Huerta · Answer

@Anders Jax

I think @John Fortes is right. They may be proposing a vanilla JV versus an actual syndicated transaction, hence why they want a single LP and a simple 50/50 split.

But to answer your other questions,

"They also want to have a non-fireable clause on the management fee, which seems way out of ordinary. Of course the LP should be able to fire the GP as the manager if they find a lower cost, competent manager, or its being mismanaged."

This is out of the ordinary. Any sophisticated investor would request a takeover clause to remove the manager and bring on a new one. When and how is to be negotiated, but this clause is pretty typical for operating agreements where the sponsor is also the manager...

"My role is finding investors, and maybe investing a bit of my dough for good faith (skin in game). I am never going to put contacts of mine into an unfair investment, or propose something offensively skewed in GP favor. So Im trying to get smart on the subject and talk to the GP and resolve issues first."

So you're an equity broker? If so, why not look for other investments if this particular GP doesn't fit what you're looking for?

"As well, is it typical for GP and LPs to have to personal guarantee loans?!?"

An experienced sponsor is usually the party responsible for being the guarantor on any loans, not the LP. Whether its personal or corporate guarantor depends on the project, financing, lender, etc. This can change if it's a newer JV, versus a more established sponsor.

Tom Ott · Answer

Yes, these can be pretty complicated. Luckily there are a lot of sponsors out there that give you all the information you need and even do the management of the property (if applicable) in house!

John Fortes · Answer

From my experience with syndications, if this is set up as a syndication, that the LP is not on the balance sheet unless they are sponsoring their deal because of their net worth. But they would be compensated for that.

Sounds like they are JV-ing the deal but throwing the terms LP and GP around. Are you using a SEC attorney to structure the deal?

Anders Jax · Answer

@Anders Jax

As well, is it typical for GP and LPs to have to personal guarantee loans?!?

Anders Jax · Answer

@Enrique Huerta

I have family that lives on Balboa Island.

It is not. Not what they are proposing. Just straight up investor gets paid back 100% first, then all profits are split 50/50. And yeah they are proposing putting in 3-5%.

I want them to propose something like 8% preferred, 70/30 LP/GP until LP IRR reaches 12%, then maybe 50/50 thereafter. Even that sounds fairly generous to the GP. But your suggestion of 12% pref and 50/50 sounds reasonable if they are confident their returns will be high. But they keep telling me they want to get roughly half of the returns as the GP, which seems crazy high. I mean the best hedge fund and private equity funds in the world take 2% management fee and 20% of profits. Yeah that’d end up being 40% of returns on a 10% gross return year (2% management fee and 20% of the 10% return), but that’s for tremendously staffed managers with a long track record.

Yeah the 13% sounds very high to me. I talked to hotel management firms who said they’d do it for roughly 5%, and marketing firms who said they’d handle the marketing for about $17k a year, which is probably 1% of revenue. So thats 6% for what these guys are proposing to charge 13% for. I need to clarify and see whether they are including ad buys in that, but I’d rather they break that out if they are and say we are basically charging 9%, and expect to spend 4% of revenue on ad buys. But I don’t think they are covering ad buys.

They also want to have a non-fireable clause on the management fee, which seems way out of ordinary. Of course the LP should be able to fire the GP as the manager if they find a lower cost, competent manager, or its being mismanaged.

My role is finding investors, and maybe investing a bit of my dough for good faith (skin in game). I am never going to put contacts of mine into an unfair investment, or propose something offensively skewed in GP favor. So Im trying to get smart on the subject and talk to the GP and resolve issues first.

Thanks

Anders