Sponsor Promote Structure Help
Hey guys I’ve been able to acquire a property at a significantly low price relative to prevailing comps in the MSA. It’s on the lower end of the mid market. My partner and I are projecting a 2.5x+ EM on a 5 year hold. It’s a mixed use deal and we have been able to secure a retail tenant above market. We were thinking of structuring the promote as a traditional 30% over an 8% preferred. However, given that we believe there’s a strong likelihood the deal will outperform wed like to structure it as a tiered IRR waterfall to generate a more accretive sponsor promote pot.
Any input on what structure you guys suggest would be greatly appreciated.
You're probably in a better position to answer this than any of us - you know who you're going to for capital and that typically drives a lot of the thinking behind structuring. A 2.5X on a 5-year implies a 20% IRR, so whether you set your hurdle at 10%, 12%, or 16% is really just a question of your faith in the underwriting and protecting your downside. Another thing you could explore if you think your potential equity partners are willing to accept a lower return is marking up the land before contributing it to the venture, that way you can take some chips off the table right away.
You are completely right and I know that it's a loaded question because it all really depends on what our equity is willing to accept and what we can sell them on, but I know we have enough room on this deal for the equity to make acceptable risk-adjusted returns along with us being able to be compensated more for the asset's performance than just a 30 over an 8% pref.
After 8% pref, maybe do a 70/30 to a 2x (or 1.50 to 1.75x, up to you/what you think your investors will buy off on. includes pref payments paid). Then 60/40 after.
Could do an EM hurdle too
After 8% pref, 70/30 to 15% and 60/40 thereafter. You can get away with 50/50 thereafter if you've got a track record, but 60/40 is fair.
Qui cupiditate placeat et porro ipsa rem provident incidunt. Rerum inventore eos qui eius eos ab dolores magnam. Assumenda ullam aperiam recusandae porro.
Cumque nihil modi ea voluptatem. Labore accusantium vel magnam ut pariatur. Officiis sed voluptate est tempore. Aspernatur voluptas natus a aut consequuntur dolor iusto est. Pariatur quod accusamus labore et perspiciatis soluta.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...