Quote from @Stuart Udis:
After reviewing here are a few questions, concerns and suggestions:
1. You mention the acquisition costs are $1M and the construction costs are $1M and total costs are $2M. Your costs include no soft costs (settlement, permitting/entitlements, finance charges, insurance, taxes and utilities. What are the true total costs of the development projects?
2. The same analysis noted above does not account for settlement costs on the exit which is customarily 6%-9% of the sales price depending on local brokerage fee and transfer tax norms.
2. Even if the soft costs and settlement costs on the exit are included, why is there a $500,000 range in what the gain might be? A $500,000 swing in profit on a $20M development might be reasonable but not in a $2M project. It points to uncertainty in your underwriting.
3. You and your co-gp are really raising $350,000 of equity, not $500,000 since you are contributing $150,000.00. Investing 30% of the equity and presumably guaranteeing the debt is more than you see most GP's contribute and should justify better splits in your favor than instances where you see a 5% or 10% co-investment. It should also make potential LP's more comfortable knowing you have considerable skin in the game plus the fact you are profiting from the merits of the actual deal at time of sale rather than collecting fees. This in my opinion is the most compelling piece of what you shared if looking from an LP's perspective.
4. More generally, the splits and structure should be determined by the GP's role, contribution and what type of value is being brought to the deal and/or was created prior to the inception of the partnership/syndication. By way of example, if you as the GP's identified this unique rear yard development opportunity that others overlooked and acquired this land at a low basis and/or obtained all of the entitlements where there is imputed equity and let's say a bank will now finance the property at a higher LTC than normal transactions, that is an example of why you can justify more favorable splits. This is not clear in the presentation of information and if that were to be the case it should be a focus of your presentation to LP's.
@Stuart Udis, thank you for a great response!
1. I left a lot out for the simplicity of the write-up. I have a giant sheet with hundreds of lines of info: OpEx, transaction costs, holding costs, contingencies, rent forecasts, etc. I also model out different scenarios like the market dropping or gaining 10% over the next year, interest rates changing, capex changing, rents changing, etc. The "Construction Costs: $1M" really means "all project fees that aren't capital costs".
2a. The other GP is a RE agent so the transaction costs are lower. We do have 4% modeled though.
2b. Again for simplicity, I gave that range more as a concept than an exact number. We expect a return of $681k with no market growth or decline. With a basic 5% market growth, we are modeling $802k return.
3. Correct. Yes, some have said we are putting a lot more in than expected. I'm doing this for two reasons. The first is to give LPs more confidence in us. Also, I have extra cash right now and this deal looks really good so I want to be a larger LP.
4. Good point! I was just looking at the returns being so high that a standard 70/30 split seemed way too high. But that's why I'm asking. Does it conceptually matter how much value we are bringing? If we have the risk-adjusted returns, we can take more of the up side by doing a 50/50 split after pref.
