Diary of an Apartment Investor

MFB - Structuring your Deal

December 09, 2020 Brian Briscoe Episode 68
Diary of an Apartment Investor
MFB - Structuring your Deal
Show Notes

Various tools to use when structuring your deal, to include preferred returns, waterfalls, and a GP catch-up.  We also review the capital stack, which is also a significant part of structuring the deal.

Examples from the podcast:

Example 1: The 80/20 split.  Let's assume there is $1m in equity and $200k in profits to distribute at sale.  The investors share is 80% of $200k which is $160k and the GP share is $40k.  Very straight forward, it's just a flat percentage.


Example 2: The preferred return.  Let's assume there's a 6% preferred return on an investment with $1m in equity.  After the preferred return is paid, the remaining funds are split 70/30.  Assuming the same $200k in profits to distribute.  

The investors get 100% of the preferred return paid out, which is $60k (6% of $1m).  

The investors then get 70% of the remaining $140k, which is $98k for a total of $158k. 

The GP gets 30% of what's leftover after the pref, which is $42k.


Example 3:  The GP catch-up. Same $1m in equity, same $200k in profits.  In this case, let's assume a 10% preferred return with a catch-up that pays the GP up to $50k.  After that, there's a 60/40 LP/GP split.


First $100k is paid to the LPs or passive investors as their preferred return.

Next  $50k is paid to the GPs as their catch-up.

Final $50k is distributed with $30k going to LP or passive investors and $20k going to GP.

 LPs get $130k and GPs get $70k.


Example 4:  The waterfall.  Same $1m in equity, same $200k in profits.   Here's how this particular deal is set up.

Tier 1: 5% preferred return.

Tier 2: 80/20 split up to a 10% hurdle - meaning until the investors receive a 10% return.

Tier 3: 70/30 split up to a 15% hurdle

Tier 4: 50/50 split after 15%


In the case,

Tier 1: the first $50k is paid out to the LP.

Tier 2: $50k goes to LP and GP gets $12.500.

Tier 3: $50k goes to LP and GP gets $21,428. 

Tier 4: $8035 goes to LP and $8035 goes to GP


Total paid out: $158k to LP and $42k to GP, but the GP gets 50% of every dollar above $200k.

Originally aired on Dec. 09, 2020


Your host, Brian Briscoe, is a co-founder and principal in the real estate investing firm Four Oaks Capital.  He and his team currently have 250 units worth $12 million in assets under management and are continuing to grow.  He will retire as a Lieutenant Colonel in the United States Marine Corps in 2021. Learn more about him and the Four Oaks team at www.fouroakscapital.com or contact him at brianbriscoe@fouroakscapital.com - be sure to let him know where you found him.

Connect with him on LinkedIn, Facebook, or on Instagram at @diary_of_an_apartment_investor