Posted by joe on August 07, 2007 at 10:45:13:
Great idea with the preferred return. I could remove my income from the first year to increase their cash on cash return first year and then jump back in year two. Thanks so much
My first big commercial deal - Posted by Joe Petrocino
Posted by Joe Petrocino on August 05, 2007 at 17:00:04:
I have tied up my first large office building in my name. I have some very experienced investment partners. We will be rehabing the old building with a construction/perm loan. I have a teneant that will lease the building for 5yrs on an absolute net basis. Total project cost is 2.5M and the rent more than covers the debt service. Partners are puting up all the downpayment for the rehab loan. They would like to make 15% Cash on cash on their money and they will acheive that in year 3 (as rent increases). My question is - what is a fair amount to give up to them on this deal? I would do this deal by myself with hard money but the idea is to build relationships and move to larger deals in the future with them. Your thoughts?
PS: they are looking at taking 70% of the deal
Re: My first big commercial deal - Posted by Ben - NYC
Posted by Ben - NYC on August 07, 2007 at 05:50:30:
There are a number of ways that you can structure this deal, 70% may not be unreasonable depending on who is doing what and how compensation for various tasks is handled.
Some deals may have the money getting a large % of the profits, i.e. 70-80% but the developer is able to take certain fees along the way. If you are managing the process you can be paid a management or development fee. You can also be paid an acquisition fee for working through all the details of getting the deal closed. You can be paid a leasing fee for taking care of that aspect. You can be paid an ongoing management fee for taking care of the building and tenant(s) once the property is leased up. You get the idea.
Another way to structure it which is a bit riskier from your side is to increase the % of the profits that you get but don’t take all the fees. This means you have to wait until the project is done to get paid and if it doesn’t make money you don’t make money.
Another element that you can put into the structure is to have a preferred return. So there can be a % split but certain parties are entitled to the first distribution in order to ensure that they get their desired return. So if your investors need $100k to achieve their 15% return they would get the first $100k of distributions before you get anything. If the deal only makes $75k then they get it all and you get nothing. Of course you can play around with how this works, maybe they get the first $50k, you get the next $25k, they get the next $50k, etc.
Every deal will be unique and needs to make sense for all parties but there are many ways to slice the pie.
Re: My first big commercial deal - Posted by DScott
Posted by DScott on August 06, 2007 at 19:17:48:
HEY wow congradulations on your first deal. I can only hope to do the same one day like you.