LP GP deal structure

[Patrick Forelli]

Hello BP community,

I recently invested in a STR last year and its going great! Projecting revenue of 84 k with a return of 25 to 30 % on my upfront investment. I am looking to invest in more STR's this year with partners and scale the business.

I am looking for a LP and GP deal structure where I am the GP that provides the labor and investment skill. I will perform market research and find the deal, I will put about 20-30 % of the upfront investment, I will perform the labor of furnishing the property and the ongoing management of the property. My LP will simply provide the majority of the investment up front (approximately 70-80% of upfront cash).

We both agree on a 50/50 split of earned equity from the mortgage. We agree we have 50/50 liability for expenses in the case of a loss.

We differ in terms of cash flow breakdown. My partner wants a 75/25 LP/GP breakdown until the initial investment is regained. After that, we split the revenue 50/50.

I was interested in a preferred return of 8% for the LP and then a 50/50 split if not 60/40 split favoring the GP for all additional income.

Here is my reasoning. I am providing the industry knowledge and skill behind the investment. If the investment under performs, I am at fault, and if the investment over performs, I deserve the credit. So with that logic, I want the LP to be protected and get paid out a baseline return first, but if the property exceeds expectations I believe the GP should capture  higher returns.

With the proposed 75/25 waterfall breakdown suggested by the LP, I feel that I would be under compensated the first 4 or so years and it may not be worth it for me considering the month of labor it takes to furnish the property and the approximately 100-150 hours a year it takes for me to manage the property. It may be worth it for me to just save up the cash to go all in on a deal myself or seek investors to simply get a hard money loan for for the initial investment.

What does everyone think about my perspective here? Are my expectations unreasonable for a GP in a short term rental agreement or are they justified? Do you have an alternative deal structure that might work better here?

I'm looking to gather market research and get feedback here so I understand what a normal structure looks like. I am sure there have been many deals between a GP and LP in short term rentals and I want to understand what I should expect to get and what is unreasonable for either side.

Thanks,

Patrick Forelli

[Adam Windham]

@Patrick Forelli 50/50 split over an 8% pref when the LP is bringing 70-80% of the initial investment is not going to be all that attractive. In more complex real estate deals there's usually a tiered waterfall structure with multiple IRR hurdles and corresponding splits between LP and GP, getting more favorable for the GP as the different hurdles are cleared. Not saying you need to get that complex, but just keep in mind where risk-free returns are right now. You can buy short duration treasuries and rip 4-5% at the moment.