All Forum Posts by: Anders Jax

@Lane Kawaoka

Well the splits are going to determine how much of the rent increases and reversion capital go to the LP, and obviously those things are key to building the model of the cash flows. But the split is certainly important, and for some reason the GP Im doing a favor in intro’ing to serious friggin investors, is proposing a wild change to what seems like a pretty straight forward part of the deal (the waterfall)

@Brian Burke

Well you could over distribute in the case of say you pay LP and GP each year and LP gets 11% for 4 years, and GP earns some decent money whatever it is, then the real estate market plummets, cash flows go to zilch or negative and they sell the property for a loss, and all of a sudden the LP has taken home a 3% IRR including the sale. Wouldnt they be entitled to clawback some of the money the GP took in the waterfall, before things went sour?

@Brian Burke

I hear you, but say the LP was getting 13% roe per year in cash, then the property sold for 3x at the end of 4 years. They would have only been paid 52% of their money back at time of the sale. So you could either think of it as they had 48% of capital left to be repaid, or they had just been paid their investment interest every year and have 100% of principal to be paid back first. Doesnt change the IRR calculation does it?

So if you had a licensed inn or hotel, all suites of 3-5 bedrooms, say 5 suites, for a total of 20 beds, property has a pool as well, no front desk/concierge, What would you pay a property manager to basically manage the cleaners (come at end of each stay, and for a fee on demand), respond to inquiries/complaints, handle and schedule maintenance/repairmen, handle bookings and do the marketing function?

Are we talking 8%, 15%...?

@Brian Burke

Thank you for that. So correct me if Im wrong but it seems like theres really two main structures in the end

1. Payback of invested capital in full, then the waterfall distribution starts.

2. Distribute the 8% pref, and 60/40 thereafter, each year, and when there is a sale, return the original capital in full and the remaining cash is also run through the waterfall.

So you’re either repaying funds first, then running the waterfall after 100% is repaid; or you are running waterfall distribution to both lp and gp right away, counting that as investment income, and the original investment will be paid back at the end, or at a refinancing, or something like that. And I guess if the ending sale or event leaves the LP below an 8% irr, then there would be a lookback provision for the GP to pay back the money they earned until the LP had made their 8%?

@Mike Dymski

25% seems like one hell of a tremendous return, but yes this whole thing is absurd.

These guys have gone from single family deals for short term rental model with unsophisticated investors basically splitting cash flows 50%, and getting 30% returns before asset appreciation, so maybe 40% returns if they are able to sell them at a good cap rate, to wanting to do multi-unit (20-100 bed) hotels, and think they are earning too much for their investors so they are proposing something absurd because its pretty obvious they aren’t familiar with institutional money and their return requirements.

Frustrating, because they do have good returns on what they’ve done, their properties are fantastic, Ive known them for 20 years, but this proposal makes me lose respect and confidence for them as real estate professionals.

If $1m is invested by LP and annual cash flow is $200k for 5 years and asset sells for $2m, lets say for simplicity split 8% pref and 60/40 thereafter, so LP gets $150k in theory per year on cash flows before selling asset, would they get paid cash $150k a year and $50k to GP, or would they generally get paid in an accelerated front end manner?

And then is it standard procedure for asset sale to be calculated as part of year 5 cash flow, totaling $2,200,000 so the pref is $80k, and then the remaining $2,120,000 is split 60/40? Or is that not the most common way for the asset value to be split?

@Brian Burke

Boutique luxury hotel developments.

4% development fee

Then that waterfall structure

And also asking for a personal guarantee from the LP.

I just don’t think I can bring this to my contacts. I think they will be offended and dismayed at me. But RE isn’t my main field, but certainly this sounds unusual.

The management fee for the property (which they would do as they have a management business) would be 13%. That seems high. They are citing airbnb managers that charge 15%, but those are for individual properties and I’m not so sure those rates won’t come down anyway, and these are boutique hotels, not airbnb properties. 13% on a property that has 20 beds and does $1.1M in revenue is $154k. That seems like a rather large management fee for a property that has no concierge, restaurant etc. Just cleaning service on request and repairmen as needed, etc.

@Greg Dickerson

Whats your standard structure

8% pref and 60/40 thereafter or something?

LP gets first 7% of returns as pref

-From 7-12% split is 50/50 LP/GP

-From 12-17% split is 25/75 in GP favor

-From 17%+ split is 10/90 in GP favor

That means that if the investment did 30% irr pre-distribution that the LP would get 11% and GP would get 19%, roughly. I mean that seems way outta whack, am I wrong?

If the return total was 17%, LP would get 11% and GP would get 6%. Still a pretty good haul for the GP.

That 10/90 in GP favor seems like nothing ive seen before in normal private equity.