All Forum Posts by: Anders Jax

 The LP I've been in talks with is a hedge fund, so they are very capable of making the investments.

You are def right that we are past the peak boom years of this cycle.  

Point taken re groundup development.  It looks like the deal is going to fall apart anyhow, and I'm in talks with developers of larger projects to determine whether I could get them a similar revolving equity line.

Thanks.

They have experience in the asset class, but not the size.  

Need family office support in what way?

I will be helping the LP select a property operator, so the GP really needs to source land or properties for rehab, do the development process, and then monitor the property's performance and look for exits and the other things a GP does while owning a hotel.

 Yes, it's a slightly different asset and that carries risk... as well the developments are larger in scale which carries risk.

My guess is that they will be too stubborn to give up any meaningful equity, and the deal will fall through, and I will partner with another developer to get them a similar funding arrangement if they can present compelling opportunities.

 Hahah, if I could only assign you an equity risk premium, I could make sense of all this advice!!

I hear you completely, and ideally this would be how it goes. I just think these guys are very green, and need a lot of explanations. For instance, they proposed a wildly out of whack waterfall structure, that had the last hurdle at 20/80 in their favor (after LP reaches 12%IRR), which is like christ guys have you not done your homework, nobody would accept this.

Ultimately yeah I'll just throw 25% out there as my cut of the GP, including asset management, acquisition, disposition and promote fees. And if they choose to decline it, I have other GPs who are looking for capital introductions.

Do you think 25% is a fair proposal?  I think I would not propose taking a cut of the development fees just because that is another job task that while it wouldn't happen without financing, is less related to the investment process and more just to the building process.

Thanks for your time man, truly.

Well I guess you could consider me a co-GP, but I would not be bringing equity to the GP, just rolling in my fee to the GP..

Bring half of the GP capital you mean? Or half of the LP capital? I would raise all the LP capital, and probably make it so they had to commit 3-5%.  

There's a lot of ways to analyze what I should get, but I think an easy one is, if I were go get 4% of the LP equity, and the GP carry in the deal is 20%, 4% LP equity=16% GP equity.  But of course the GP promote is a much riskier cash flow because they might not ever earn it, so it should be applied a discount rate.  I could do the long and detailed run-through of a dcf using a 20% discount rate for GP promote cash flows and say 12% discount for LP cash flows and see what equity % makes them equal, or I could just roughly apply a 10-15 point premium to the 16% equity and shoot for about 25-30% of the GP.

What do you think of it in that sense?

Ultimately, I need to convince these GP's, who are used to dealing with friends and family money, where they were lucky enough to split all cash flows 50/50, pari passu, and have the loans co-guaranteed, to take a deal with a 20% carry, an 8% pref, serious collateral put up, etc.  They don't know what institutional capital deals look like and they for some reason think they should pay me very little fees, and should be taking 50% of the profits of a project.  I need to get their heads out of the clouds. 

 What size deals are you seeing this on?

So the general giste is you have a GP developing boutique all-suite hotels from a first-time hotel operator and investor (used to invest in apartments and airbnb/str single and some multi-family). In growing markets like Portland, Austin, Nashville, Asheville etc.

The promote structure is
9% pref
80/20 to 13%
70/30 to 18%
65/35 therafter

1% asset management fee, 3% development fee, .5% asset disposition and acqusition fees.

Of course the asset management fee, acquisition and disposition fees would have a relatively normal discount rate.

But what would you discount the promote at. I was thinking probably somewhere in the high teens, maybe 20%. But that's just based off of feel. Anyone have any good dcf models from actual deals for new build/relatively high risk projects?

P.S. this is all for purpose of modeling a GP DCF to get a sense of it's inherent value, so the GP can maybe sell a piece of their end.

 BTW, you should message me, I'm a former AZ guy, and we may have some overlap and potential to collaborate down the road.

Thanks.

The GP would probably commit 5% of the capital, depending on the size of the deals.  They are actually looking for the LP to co-guarantor the loan, so it's an even bigger ask of the LP.

It's not like the GP hasn't done well. They own or co-own about 35 single family residences with maybe total equity value (theirs and others) of $25M.  But they said they spend roughly 1/3 of their time on raising funds, they are running out of funds, and they will be doing deals that are anywhere from their prior norms of a single residence $400k equity check to a $15M equity check for a small hotel.

@Zachary Rall

So do you think there should be a timeline after which they no longer pay me for deals funded by that LP?

What about the development fee for overseeing development of land into a building? Should I ask for percent of that? Maybe a reduced percent on it, but some percent?

I agree I am taking same risk as them. But original proposition was to take 4% of assets raised and treat it as LP capital, as I’d be rolling my otherwise cash compensation into the deal. As an LP i would have a very good chance of at least getting the 8% pref, and almost a certainty of getting back a large portion of my principal. So for being in the GP box and not the LP box, thats a big risk premium (a bird in the hand is worth two in the bush); I should actually use some discount rate and sensitivity tables to support the risk adjusted npv of being paid from GP and not LP. Potential for extremely little as GP vs certainty of at least a pretty darn good payday as LP, and potential for an amazing payday as LP will get at least an 80% carry supports a compelling case to ask for 25%.

Do you think 25 is the right number. For further clarity, one of the parties I’ve brought forward has indicated they will basically give carte blanche to call capital as long as the GP commits significant capital and personal guarantees to prove they will lose heavily if its a bad deal. There’s not many LPs that will also fund a million dollar deal and a 20 million dollar deal, and have no time horizon. Its a crazy unique potential partner.