All Forum Posts by: Anders Jax

Where the LP was asked to be a co-guarantor of the loan along with the GP?

This seems unusual.

@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.

@Anders Jax

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

@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

I would like to take a look at a whole bunch of sample term sheets.

I want to know the typical structure for a real estate fund, and for a single asset purchase deal.

E.g. what types of payment structures are most used, is it almost always the waterfall, and if so, whats the average waterfall breakdown? What are the key legal features involved in a term sheet?

I see a book on Amazon called Term Sheets For Real Estate Funds but it wont let me download the whole book, just a sample...ugh.

@Enrique Huerta

Thanks for the reply enrique. I will actually be in your city in a week!

The project sizes are roughly $2-4m in equity. GP wants to raise a fund where they can call down capital as they spot opportunities. Probably $25m or so.

I have to inquire more to this interest-free loan, it just doesn’t add up to me, the size of this. It sounded like it was to help the GP pay taxes on income they were technically earning but not taking out of the business, but the number they are talking is huge. Sounds hinky.

As far as the 50/50 plus preferred, so how would that work, they get say an 8% preferred then split 50/50? That kinda just sounds like a waterfall then.

Of course GP wouldnt get paid back first, it would be LP, but there could also be a normal waterfall where they are both paid out starting at initial cashflowing period, in accordance with the waterfall structure.

The GP is also managing the property, roughly 50 room hotel, and for 13%, which they say is breakeven, but sounds high to me.

LP is going to want to be able to fire them as manager if they find a cheaper and competent manager, which there are cheaper managers per a quick search.

If they take 13% of revenue, then 50% of returns, they will be walking away with like 75% of the pre-management-fee cash flows of the business, if not more. This seems like a hugely skewed structure. I dont know how many sharp investors will go for it...

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.

If you had a property, say a multi-family apartment building that you were converting to an all-suite hotel, what % would you pay a property manager?  I've got a deal where they were proposing 13% of revenue to manage the property.  I know airbnb managers take like 25% (which is what theyve done a ton of in the past) and boutique hotel operators take like 5-7% and you can get a marketing firm for another $1500 a month, which is probably another 1% of revenue.  So I'm not sure how to handicap this.  It's a fairly automated business.  You use bookerville, airgms, or liverez and it handles most of the dirty work.  So potentially $130K a year to manage a 10 unit boutique hotel with no day-to-day staff, seems high to me.  They also want a 10 year or until-sale contract to manage the property which seems nutty to me.

 Well interestingly airbnb/short term rental property management companies charge like 25% of revenue which seems insane. But these are going to be multi family all short term rental, so I really think it should be closer to a hotel managemen percent, maybe 5-7% including management and sales/marketing. Cuz you can just use a third party app like bookerville or liverez which makes everything pretty much automated, and Ive talked to really good marketing firms who charge like $1500 a month, which if you had 10 properties in a building, thats $1600ish per property per year, which is probably 1-2% of sales, max. 

They wont be putting in much of their own money, maybe 3-5%, and I dont think I can demand 4% of their investments as well, just 4% of the money I raise, rolled into the deal, so basically I can buy say $40k of equity in the deal, and in that case, the LP/GP split will favor LP so thats where I want to be

 Thanks Chris but Im not sure how you are getting to GP being the better investment. If the cash flows are split in a waterfall structure like you indicated, a majority of the cash flows would go to the GP.

GP has to pay out the hurdle essentially. Dont even start earning until after the pref.

So are you thinking of some type of deal where the GP takes a yearly management fee percentage? Otherwise Im not sure how taking the GP side could earn more. 

They will in fact be managing the sales and marketing of the property, and taking a nice 13% to do so, but I dont think I can take the fees and roll it into owning part of that management fee. 

Otherwise in a normal deal, I am under the impression GP would find an investment, offer say an 8 pref, 80/20 til 12% then 60/40 thereafter, and the GP would hire a management company who takes say 5% to manage the hotel. In that case, the GP would never make more than the LP.