So far it hasn’t been much of an issue with my investing experience, but another open-ended fee in nearly every offering is that the “Company” has the right to be reimbursed for all out-of-pocket expenses. Furthermore, some allow the GP to make loans to the company at rates I’ve seen as high as 12% to cover expenses. In one of my deals there was over $3,000 in meal and entertainment costs. Didn’t affect the bottom line much, but it’s still a fly in the ointment. If the syndicator has 50 properties and is doing this, they are eating well.
Unfortunately, retail LPs typically have very limited leverage when it comes to negotiating or redlining subscription documents.
That’s why it’s so important to look for GPs who don’t operate at the edge of what’s legally permissible, but instead choose to consistently do the right thing. Of course, easier said than done lol
Sometimes, but I was referring more to a typical institutional development JV. So, not so much pure "pref" but rather a pari passu first hurdle.
So: First, to the members on a pari passu and pro rata basis until Investor Member has received distributions sufficient for it to achieve an IRR of 10%;
Second, (i) 80% to the Members on a pari passu and pro rata basis and (ii) 20% to Sponsor Member, until Investor member has received aggregate distributions sufficient for it to achieve an IRR of 13.5;
third...(70/30)...
I have two deals on my desk where one has an 11% first hurdle and the other a12%. Granted, these deals are not garden style multifamly developments but rather ground up student housing and office to resi conversion with institutional LPs. So, a bit more risky. I suppose it might be an apples to oranges comparison?
The great thing about this space is that everything is pretty much customizable. I have seen deals similar to what you described but some people have referred to them as "structured equity." These deals mirror rights, remedies, and preferences of customary pref equity, but have a back end profit share so it is more like a participating preferred. Sometimes this helps convincing Freddie/Fannie that the equity truly is "soft pay" pref and not the dreaded "hard pay preferred equity."
Agree, development (or conversion) is apples to oranges to value-add MF. That said, I'd be surprised if double-digit first hurdle (as the 10% in your example) exists in the retail LP space..
And that's precisely why GPs like to have both channels (insti and retail): with the latter investor base, terms are more favorable to the sponsor..
Thanks again for another solid post. Where was this information 15-20 years ago while I was coming up as a young CRE lawyer trying to figure out how deals piece together?!?!
Generally, I’m seeing the first IRR hurdle on the higher end of the range moving up to 11-13%. Syndication-type raises with less sophisticated “LP” investors are often an exception in that they are more likely to accept a first hurdle in the single digits.
Are you talking about "pref" (as in "7% pref, 80/20 up to 14% IRR", etc?) I should have been more explicit: technically, the 7% in this case is the first hurdle (0/100 to 7%)
I've only ever seen double-digit first hurdle on debt funds, are you seeing double-digit on REPE?
So far it hasn’t been much of an issue with my investing experience, but another open-ended fee in nearly every offering is that the “Company” has the right to be reimbursed for all out-of-pocket expenses. Furthermore, some allow the GP to make loans to the company at rates I’ve seen as high as 12% to cover expenses. In one of my deals there was over $3,000 in meal and entertainment costs. Didn’t affect the bottom line much, but it’s still a fly in the ointment. If the syndicator has 50 properties and is doing this, they are eating well.
Unfortunately, retail LPs typically have very limited leverage when it comes to negotiating or redlining subscription documents.
That’s why it’s so important to look for GPs who don’t operate at the edge of what’s legally permissible, but instead choose to consistently do the right thing. Of course, easier said than done lol
Sometimes, but I was referring more to a typical institutional development JV. So, not so much pure "pref" but rather a pari passu first hurdle.
So: First, to the members on a pari passu and pro rata basis until Investor Member has received distributions sufficient for it to achieve an IRR of 10%;
Second, (i) 80% to the Members on a pari passu and pro rata basis and (ii) 20% to Sponsor Member, until Investor member has received aggregate distributions sufficient for it to achieve an IRR of 13.5;
third...(70/30)...
I have two deals on my desk where one has an 11% first hurdle and the other a12%. Granted, these deals are not garden style multifamly developments but rather ground up student housing and office to resi conversion with institutional LPs. So, a bit more risky. I suppose it might be an apples to oranges comparison?
The great thing about this space is that everything is pretty much customizable. I have seen deals similar to what you described but some people have referred to them as "structured equity." These deals mirror rights, remedies, and preferences of customary pref equity, but have a back end profit share so it is more like a participating preferred. Sometimes this helps convincing Freddie/Fannie that the equity truly is "soft pay" pref and not the dreaded "hard pay preferred equity."
Agree, development (or conversion) is apples to oranges to value-add MF. That said, I'd be surprised if double-digit first hurdle (as the 10% in your example) exists in the retail LP space..
And that's precisely why GPs like to have both channels (insti and retail): with the latter investor base, terms are more favorable to the sponsor..
100% agree.
Thanks again for another solid post. Where was this information 15-20 years ago while I was coming up as a young CRE lawyer trying to figure out how deals piece together?!?!
Generally, I’m seeing the first IRR hurdle on the higher end of the range moving up to 11-13%. Syndication-type raises with less sophisticated “LP” investors are often an exception in that they are more likely to accept a first hurdle in the single digits.
Mike,
Are you talking about "pref" (as in "7% pref, 80/20 up to 14% IRR", etc?) I should have been more explicit: technically, the 7% in this case is the first hurdle (0/100 to 7%)
I've only ever seen double-digit first hurdle on debt funds, are you seeing double-digit on REPE?