Originally posted by @Brian Burke:
@Bar Goldstein this sounds like a securities offering so be sure to get the assistance of competent legal counsel that specializes in securities law. Doing it incorrectly can not only land you in court, it can land you in jail. I don’t know about you, but I don’t look good in an orange jumpsuit. Your lawyer will be sure you do it right and keep your freedom.
If you are going to invest money alongside your investors you are entitled to earn the same return on your cash that they earn on theirs. So when it’s said that the investors get 80% and you get 20%, if you contribute half of the cash you would get 20% + 40% (half of the “investor’s” 80%) = 60% and the other investors would get 40%, etc. In other words, the investor portion is always split pro-rata and that includes your capital.
On to your questions:
1. In talking with the hundreds of investors that invest with me, I've learned that investor expectations are all over the map. There is no right answer here. Some care more about cash flow, some care more about growth. In either case, if you don't have an extensive track record your investors will perceive higher risk (rightfully so) and thus would likely expect a higher return, unless they are a good friend or relative. Or if the property is in a bad neighborhood they would likely expect a higher return, etc. But generally I've found that investors are looking for 7-10% cash on cash (which might mean 4% in year 1 but growing to double-digits by year 3 or 4) and 13-17% IRR net. I typically structure this as a waterfall where the investor gets 100% of the cash flow until reaching 8% (cumulative) and then there is a split over that starting at 70/30 or sometimes 80/20 until reaching a hurdle, such as 12%, then steps up to 60/40 until another hurdle such as 15% and then goes to 50/50. And of course there are many variations on that theme.
2. The syndicator is typically expected to be the qualifying individual on the debt and be the guarantor, or in the case of non-recourse debt, the carve-out guarantor for the bad-boys. Any investor contributing over 20-25% (depending on the lender) would likely also be required to either sign on the guarantee or carve-outs or at least go through underwriting and background and OFAC checks.
In regards to your waterfall structure, is the 12% hurdle related to the entire fund or specific project IRR? If it is the IRR, do you have to wait until the property is sold to calculate this number?
Also, if you promise a 8% pref annual return to investors and each year the funds pref return is 12%, who keeps the rest of the proceeds before the IRR waterfall comes into play, as before the property is sold? Thanks.
