Originally posted by @Tony Robinson:
@Michael Ealy thanks for another insightful answer. I hear most of the syndication guru’s saying the normal GP/LP split is 30/70 (maybe that skews more towards the GP after certain milestones are hit), but I’ve seen a few of your post where you mention YOU’RE the 70.
Can you share how you uniquely position yourself/structure your deals to get passive investors to choose you at 70% over other syndicators at 30%?
You make a super valid point in saying less units with more equity is a better business model.
Tony,
Yeah - I am not a "normal" apartment syndicator ;)
The main thing is I get deals with superior returns not marginal deals. In a way, the way I structure it with 70/30 GP/LP is actually beneficial for me and my investors. Why? It "forces" me to get deals with IRR of 30%-40% or higher.
I wrote this on a separate post but the bottomline is, most syndicators give away 70% to the LP but they get marginal deals - say 15% IRR. Let's simplify it (but the correct calculation is not as straightforward as below however, I am simplifying it just to illustrate the point):
Marginal return of typical syndicator: 15% IRR x 70% = 10.5% IRR for the LP
Mike Ealy's project return: 40% IRR x 30% = 12% for my LP
Not only does my investors benefit from the higher return, they are also protected from market downturns. I did the math on this but the bottomline is that, the 10.5% IRR that the LPs are supposed to get...when the market goes down and say, the projections are off by 20%, the LPs of a typical syndicator's deal will get 0% real return and their money is stuck in the deal. In contrast, my LPs will likely get 6-8% IRR while getting their capital back (because even when market cap rates increase by 100 basis points, I can still sell my deal profitably).
Investors love safety and being able to get their money back first, before they look at IRR.
I have not lost money for my investors even during the Great Recession of 2008-2009 and investors love a good track record.
Lastly, when I refinance and I return my investors their capital, I don't buy their equity out. They still own 30% of the deal and get all their money back. As a result, they reinvest with me on my next deal because with me, they get to own equity in MULTIPLE properties with the same initial capital. With a typical syndicator, when they get their money back, they can only move their money to another deal but they no longer own the property they first invested in.
