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 email@example.com - be sure to let him know where you found him.
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