Investor · Milford, CT · Member since 2012 · 592 posts · 285 votes
I am looking to expand past 2,3,4 multi's and into 12+ multi's. In my past deals I basically just gave any equity investor profit equal to the capital they put in for the overall project. For example if they put in $25k on a $100k project they would only get 25% of the revenue after all expenses of course.
Now that I want to get into bigger projects, do any of you give a little more in percentage of revenue? Or should I stick to $1 per equity 1% and not give any extra basis points.
I ask because I have a partner insistant that if we get into bigger projects we may have to give 80 to 90% of revenue for equity partners. I personally think he is off his rocker because we will also be equity partners and most likely be on the note up to 70% LTV.
As for debt partners, I already understand they get a set % back on their investment for a given period. No question there if we need to add a few basis points, aka HML.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
13y
Hi George.
Generally investors get paid some percentage of profits; not revenue. It is strange to me that you're sizing their equity stake based on revenue and I haven't really seen this done very often.
Larger deals generally have some sort of setup that gives the pure equity investors preference on distributions. These are frequently called "preferred" (or pref) structures and the promoters (you) are generally paid AFTER the investors get paid whatever you have told them they're getting. Notice that I didn't say PROMISE. This is a very bad word with regard to securities and structuring deals.
This is a very complicated topic and there are hundreds of threads on BP about it. I would suggest doing some research on existing threads. The bottom line is that you pay your investors what you think is fair and you generally want to give them the least they'll take to raise the money you need. How the profit pot gets shared can be done an infinite amount of ways, but 6-10% preferred returns followed by some splits past that are common. There is also a concept of a "match" where you match their pref prior to the profits being split afterwards.
You can do things like split the profits up to some yield and one rate and past some other yield at a different split. The waterfall would then show who gets paid what and under what circumstances.
The order of distributions is generally logically divided into value creation by the promoter. If you generate higher yields you should be entitled to participate more in those portions of the profits. Using a partnership structure you want to create alignment and compensate the investors for value creation; not revenue optimization.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
13y
Hi George.
Generally investors get paid some percentage of profits; not revenue. It is strange to me that you're sizing their equity stake based on revenue and I haven't really seen this done very often.
Larger deals generally have some sort of setup that gives the pure equity investors preference on distributions. These are frequently called "preferred" (or pref) structures and the promoters (you) are generally paid AFTER the investors get paid whatever you have told them they're getting. Notice that I didn't say PROMISE. This is a very bad word with regard to securities and structuring deals.
This is a very complicated topic and there are hundreds of threads on BP about it. I would suggest doing some research on existing threads. The bottom line is that you pay your investors what you think is fair and you generally want to give them the least they'll take to raise the money you need. How the profit pot gets shared can be done an infinite amount of ways, but 6-10% preferred returns followed by some splits past that are common. There is also a concept of a "match" where you match their pref prior to the profits being split afterwards.
You can do things like split the profits up to some yield and one rate and past some other yield at a different split. The waterfall would then show who gets paid what and under what circumstances.
The order of distributions is generally logically divided into value creation by the promoter. If you generate higher yields you should be entitled to participate more in those portions of the profits. Using a partnership structure you want to create alignment and compensate the investors for value creation; not revenue optimization.
Investor · Milford, CT · Member since 2012 · 592 posts · 285 votes
13y
Thanks Bryan for the response. Well thought out. Oh I meant profit sorry not revenue. Although I have seen smaller deals done on revenue but usually its the OPM model where PML fronting the whole deal.
I will continue searching BP since I am rather new here.
Real Estate Investor · San Clemente, CA · Member since 2011 · 209 posts · 47 votes
13y
We are equity investors for an SFR flipper, we provide the purchase money, then split profits 50/50 with the flipper. This is a 100% passive investment.
If you're investors are simply money partners, how do you factor in you're sweat equity? If you are assigning % of profits equal to % of invested cash, do you include you're fees etc as an expense so you get paid for you're work?
If you are offering 50% of profits for 50% of the investment we need to talk! What happens if I was in 100%? Do I get all of the profits?
Sorry if I haven't totally understood you're position.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
13y
Labor ("sweat equity") and expertise in a deal is commonly factored into:
1. Fees - These are specified in your operating agreement
2. Splits to promoters - This is generally for expertise in the deal
A simple deal for SFRs generally just rounds and uses option 2. Note there are taxation reasons to do this too. Splits are more favorable than fees generally.