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.
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