October 1, 2025 • 25 mins
Money isn't everything when it comes to real estate partnerships. The secret weapon is knowing how to structure deals that benefit everyone involved.
This episode takes you behind the scenes of effective deal structuring, breaking down exactly what makes partnerships work in real estate investing. We start with the fundamental building blocks – understanding the difference between General Partners (active managers) and Limited Partners (passive investors), and how their roles shape the entire investment structure.
Brian reveals the typical profit splits you'll encounter in the market, from 50-50 arrangements to the more common 80-20 in favor of the investors. You'll learn how these structures evolve depending on deal size, from small duplexes to multimillion-dollar syndications. We also demystify preferred returns, waterfall structures, and creative financing options like preferred equity that become increasingly important as you scale your investments.
Perhaps most valuable is our candid discussion about partnership pitfalls. We share real-world insights about the red flags to watch for, how to clearly define roles and responsibilities, and why experience matters tremendously when evaluating potential partners. You'll discover why two beginners partnering rarely adds value, and how to identify what unique contribution you can bring to the table.
For newer investors, there's an especially powerful takeaway: you don't necessarily need capital to participate in larger deals. By finding opportunities, connecting with investors, or bringing specialized expertise, you can earn equity without the initial cash investment. This episode provides both the technical knowledge and strategic understanding to structure partnerships that stand the test of time.
Ready to structure your next deal for maximum success? Listen now, and don't forget to subscribe for more insights that help you build wealth through Northwest Arkansas real estate.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_00 (00:07):
Welcome to Northwest Arkansas Investing Podcast, your
go-to source for real estateinvesting in Northwest Arkansas.
SPEAKER_02 (00:12):
With your seasoned investor just starting out, we
bring you expert insights,market trends, and practical
strategies to help you buildwealth through real estate.
SPEAKER_01 (00:20):
From buying and selling to property management
and long-term investmentplanning, we cover it all so you
can make smart, informeddecisions in this fast growing
market.
Let's dive ahead.
SPEAKER_02 (00:30):
Welcome back to the NWA investing podcast with my
co-host Brandon Still.
Today topic we're talking aboutdeal structuring, effective
structuring for beneficialpartners.
So love it.
SPEAKER_01 (00:46):
Yep.
I think this is a this is areally good topic for a lot of
folks out there, whether they'rejust getting started or whether
they've been in it a long timeor even just kind of even if
they've invested as an LPlimited partner in uh in
previous deals, but maybehaven't seen what uh what
structuring partnerships lookslike um from the outside and
(01:07):
maybe from from others uh likeyourself, Brian.
And and uh and so yeah, I thinkwe're gonna we want to dive into
some of these topics um you knowand and really just kind of how
it evolves over largerpartnerships, you know, units or
deals that are you know 10million plus or let's say 20
plus units or or whatever, andthen even how it how Brian and
(01:29):
myself have have looked at dealsfrom a partnership perspective,
um, even when they're smallerand in two to twenty-four units,
if you will.
So um, so yeah, Brian, I'd I'dlove to dig into to some of
these topics.
When when it I think just somesimple terminology that you'll
hear from a lot of investors, Ithink would be good for those to
know what what is GP and LP?
(01:51):
You hear a lot of that out inthe market.
Um, investors will be talkingabout GPLP.
Just for those that don't knowthat, what does that mean?
SPEAKER_02 (01:59):
The general partners are the active partners in the
deal, they're the ones who aresetting up legal lending, asset
managing, constructionmanagement, um, and seeing the
property through.
And the limited partners are theinvestor partners.
They're gonna be limited intheir liability to the amount
(02:21):
they invest.
So they essentially, dependingon how you set it up, um,
usually will have no say in theproject.
So if you're an LP, youdefinitely want to understand
the structure, you want tounderstand the GP who the GPs
are on their deal, the deal,their track record, their
experience, their business plan,their underwriting.
(02:44):
Um, but yeah, so simple terms,general partners are the active
partners and limited partnersare the quote unquote passive
investor partners.
SPEAKER_01 (02:53):
Yeah, and limited partners, I think that yeah, I
think that's a good good way toput it, like you said.
Uh they're they're only limitedto their their liability and are
oftentimes silent partners, justthe money, right?
And and not necessarily have anysay in kind of what's going on.
Um so yeah, I think that's oneof the biggest building blocks
(03:14):
when it comes to uh dealstructure and kind of what
partnerships look like.
What what do you see out there?
I know this is gonna lookdifferent from smaller deals to
larger deals, but uh Brian, Iknow you've done both.
So what what is you know when itcomes to a smaller project,
maybe it's a duplex, maybe it'sall the way up to 24 units, or
maybe even a little bit bigger.
On smaller deals, what what aretypical partnership structures
(03:36):
that you've seen out there?
SPEAKER_02 (03:38):
Yeah, on the smaller deals, it I think it ranges
pretty pretty far from 50-50partnership where 50% of the
profits are going to the limitedpartner and 50% are going to the
active partners, to as high as90% going to the limited
partners and 10% going to themanaging partners.
(03:59):
So and then sometimes you'llhave fees on that fees paid to
the drilling partnership for uhall the work that they did
putting the deal together andall the deals that didn't come
together before that deal.
So me typically I I shouldgenerally charge no fees or very
low on my deal structures, butyou can see those as high as
(04:22):
five percent.
I I would be very hesitant toinvest in anything with with
higher than one to three percentfee.
You know, it is reasonable forthe general partners to put it
together, even though I don'tusually charge it.
Um it is a reasonable, uh it'sit's pretty common you see out
there.
Um and then yeah, for LP GPsplit, anywhere from 50-50 to
(04:48):
90-10.
You want to clarify with yourpartnership if your investment
is being paid back before that.
So if I'm investing$500,000 in adeal, am I is a profit structure
80-20 to me, 80% to me until Iachieve my capital back, or is
(05:11):
that after I achieve my get myuh capital back?
So, you know, as an investor, II also invest as a limited
partner too.
Um I would want my capital backbefore there's any sort of
profit profit share.
Yeah.
Another thing that is also outin the market is a preferred
(05:32):
return.
You know, that's more common inthe syndications where um you
know if I'm investing a hundredthousand, then and there's an
eight percent preferred return,that means that I'm getting
eight percent payback before anysort of splits, whether that's
70, 30, 80, 20, 90, 10.
SPEAKER_01 (05:52):
Yep.
And is that what kind ofdistributions would you normally
see on something like that on apreferred return?
Is that like a monthly or aquarterly, or is it on the sale?
SPEAKER_02 (06:02):
Yeah, monthly, quarterly.
It depends on the business, likedepends on the asset.
Usually existing, you're gonnahave a lot higher cash flow um
than um like a developmentproject where that's that
preferred return is probablyaccruing, where you know, you
don't have three years of cashflow.
So if you have a preferredreturn, that means that's
accruing to you.
(06:22):
Um you can get as complicated asyou want.
You could have 8% preferredreturn.
You can have uh waterfallhurdles where you know once the
investor achieves uh 16, 18,20%, then it goes to 50-50.
So it could start off as 8%preferred return, 60% to the
(06:43):
investor, 40% to the managingpartner, and then when they
achieve uh 18, when the investorgets 18%, then it goes to 50-50.
Um much those kind of waterfallhurdles and preferred returns
and fees are much more common onlarge deals, you know, where
it's five million and up, youknow, where you have a more
(07:05):
investors and maybe more generalpartners on the deal where
there's a little bit more workgoing in on that.
Um me typically it's usually at80-20.
Like my bread and butter is justan 80-20 straight split where I
don't charge any fees to thedeal, I'm getting I'm getting
20% quote unquote sweat equityfor putting the deal together
(07:26):
and managing it, and then myinvestors get 80%.
SPEAKER_01 (07:30):
Usually how so typically the way those are set
up, I know you know yourself asa as a GP or uh you normally
would be the deal finder andputting the deal together, and
normally, like you said, there'sthat sweat equity, or or maybe
you know, if you're let's sayyou're doing an 80-20 split, do
you typically as a GP or ifyou're getting the 20% split,
(07:52):
you know, just for those thatare like trying to figure out
how to set up theirpartnerships, is that typically
how the the initial investmentis as well, or is there you
know, let's give you an examplefor a million-dollar deal would
for the 250,000 that they needdown or whatever, would that be
evenly split?
Like the 80% partner would put80 per 80% of that 25%, and then
(08:16):
the other partner would put the20%, or how how do you normally
see like the initial investmenttoo?
SPEAKER_02 (08:21):
For me, it I'm usually not putting besides my
time and probably some money,like touring the property and
doing the due diligence on theproperty, you know, have some
kind of risk capital and andmaybe an earnest money deposit.
But for me, I I'm usually notputting like 20% of the required
(08:43):
capital, but you certainly youprobably you want to see the
general partnership having somesort of uh skin in the game,
especially if there's a fee.
If there's not a fee, then youknow, like for me, my argument
is I'm not getting paid until myif I don't have a fee, I'm not
getting paid till my investorsare getting paid.
So I'm essentially working forfree until my investors are paid
(09:06):
back.
But it's not uncommon for thegeneral partner to also invest.
If the general partner is alsoinvesting, usually you see that
they'll probably have a littlebit more of that 20% than maybe
that maybe their contribute isweighted towards that 80-22.
SPEAKER_01 (09:24):
That's a good point.
I think I think that's somethingto remember for those that you
know, maybe you're looking toyou you'd like to start in a
little bit higher bracket andmaybe not buy a duplex or a
four-plex or whatever, but you'dlike to buy some bigger deals
and but you don't necessarilyhave the cash to do so.
Really an opportunity for anyinvestor out there, if you want
to get start getting into thesebigger deals, is finding a way
(09:45):
to find the deals and put thedeals together and earn your way
into a spot.
And and I in my opinion, and youprobably say the same, uh, you
know, there's no reason to bescared to give up equity, I
guess, if you will.
Uh, you know, like your will- itsounds like your willingness in
some of these deals to give up agood portion of the equity, but
(10:06):
still get to have a piece justfor putting the deal together
and but not having to have theinitial capital investment, if
that makes sense.
SPEAKER_02 (10:12):
100%.
My and my pitch to uh like myinvestors who have you know
their own businesses that aremaking them multiple six figures
or multiple millions, theirtheir time is better spent
building that business thangoing chasing down a deal where
they may get they they're gonnakeep an extra 20%, but at the
same time, they're taking timeaway from their business, their
(10:34):
corporate ladder, their family,and they may not even achieve
the same return, they may noteven achieve the same uh profile
of returns as someone who's outthere has access to really good
deals, has a good team to manageand execute on operations where
(10:55):
they may end up making 10 or15%, where if they would have
invested with someone else, giveup some control, give up a
little like of the quote unquoteequity, but they usually you you
can make better return.
Just like just like a goodlender or a good CPA or a good
broker, you know, you're payingthat service to not have to do
(11:16):
it yourself.
You know, usually they'regetting that you're earning that
back.
SPEAKER_01 (11:20):
Yeah, that makes sense.
I love that.
Uh help walk me through some ofthese creative structuring and
options that you mentionedthere.
Some of these uh I'm not even asfamiliar with.
Um, so I'd love you to kind ofrun us through this.
SPEAKER_02 (11:34):
Yeah, so we have on here preferred equity, so that's
usually seen on much largerdeals, 5 million, 10 million.
That's something that comes inbehind preferred equity and
mezzanine debt.
Um coming in uh behind thelender.
So the lender might loan up youknow 65% or 70%, then you might
have preferred equity come inand lever it up to 80%.
(11:58):
So, you know, the bank's lendinguh$6.5 million, and then you
have an uh a preferred equitycome in for$1.5 million, and
then the investors are bringingin that extra$2 million, you
know, the equity.
So it'll sit in second positionabove your equity, usually it's
(12:19):
higher, it's a higherpercentage, usually it's
anywhere from 12 to 16 percent,but it's a set return.
So you know the argument to usepreferred equity is if I can
make above 12 to 16 percent onmy real estate deal, which you
should, you I mean, I'm notgonna do a deal if I think I'm
making 12 or 16 percent.
I I I would I I try to go foryou know twenty percent net to
(12:42):
my investors at least for me todo a deal on an annual basis.
But if you're making above that,then theoretically it makes
sense to pay that out.
But you want to be carefulbecause sometimes a preferred
equity will also have additionalfees.
Obviously, your lender has fees,though those can range quite a
bit, but the preferred equitywill have a little bit of fees
(13:03):
and then which adds extra stressto the deal.
Any fees to a deal adds stressto a deal.
That's money that's not goingback into the property, that's
money that's just going to yourbasis.
Now that's you're gonna have torecoup that on the sale by
forcing the appreciation uhversus money in a cap money
towards capex or money towardsthe property, that that's
(13:24):
immediately going to the value.
So it's also another partner inthe deal, um, but it can help on
larger deals and um can help thereturns.
So I I would just be careful onthat.
You know, some of those guys areuh you want to be careful with
on on how they structure it ifthey have takeover rights like
the lender, so um, it's justanother tool to use for the
(13:47):
larger deals.
SPEAKER_01 (13:48):
Yeah, that makes sense.
And then one that's standing outto me here is is code GP
partnerships.
Um for you, does it is thattypically, you know, like let's
just say it's a 50-50 split, oris that where there'd be code
GPs and LPs in the deal?
What do you where do younormally see that play out?
SPEAKER_02 (14:05):
Yeah, so you know, previously I was with a
syndication company for a coupleyears.
That was much more common in thelarger deals when a when a
syndicating deal is where it's a$20 million deal and you're
gonna have to raise five millionfive million dollars, and you
know, you have a couple partnersthat bring in additional
(14:26):
capital.
So you have access to a milliondollars of capital.
Sometimes they'll get a piece ofthe GP.
You know, that you're supposedto have other roles besides just
raising the capital.
You know, maybe they have someasset management experience,
some marketing experience.
So that 20 to 40 percent that'scarved out for the GP, sometimes
that's not just one GP, that'smultiple partners.
(14:47):
One partner might be boots onthe ground, one partner might be
um raising the equity, onepartner might be leading
construction and assetmanagement.
So that 20 to 40 percent can becarved up between the different
GPs and their responsibilities.
Gotcha.
Definitely want to be clear withthose roles and
responsibilities.
(15:08):
You know, there's a developmentproject I'm looking at in uh
here in Arkansas, and you know,one of the partners wants to
kind of lead the construction,and then one of the other
partners wants to lead thefinancing and the asset
management and the operations.
Um just make sure you have thosespelled out, you know, because
(15:32):
it's all good until you, youknow, when you close the deal,
and then some people have otherpriorities, and um you want to
make sure it's really spelledout and up and an operating
agreement.
So have a good attorney and makesure everybody's on the same
page at the at the beginning.
SPEAKER_01 (15:47):
Yeah, that makes sense.
Seems like those could, youknow, you definitely want to
make sure you have the rightpartners if you're gonna be
co-GPs with them, becausethere's a lot of
responsibilities involved, andand uh so good.
SPEAKER_02 (16:00):
Yeah, and make sure you're adding value to each
other and and make sure you'renot partnering up, just a
partner.
You know, I see a lot, and onthe other token, I see a lot of
newbies like wanting to partnerup, you know.
Yeah, it's like two newbiesaren't really adding, but yeah,
that's great.
You're both exciting andlearning about real estate, but
I would probably advise maybeyou guys just uh you know, quote
(16:20):
unquote pick each other brainsand stay in touch, but um you
want to have some uh added valueto the partnership.
SPEAKER_01 (16:28):
Yeah, yeah.
For those for those, I guess,newbies, if you will, you think
there's more value in themtrying to go, you know, find a
way to do their own first dealat least, and then getting into
a partnership afterwards, andthat way they have at least some
experience to be able to do intoa partnership and see you know,
want the same out of theirpartner.
Is that kind of what you wouldrecommend?
SPEAKER_02 (16:48):
I think so.
I think it'd be good it's goodexperience.
You can, you know, I'm not I Isay starting small is good.
I'm not like you have to buy abig deal your first deal.
Like I I think starting smallhas a lot of value and putting
together a deal and seeing it,you know, it it falls on you.
But at the same time, there isvalue, and even if you are a
newbie, maybe you're the onefinding the off-market deal, and
(17:11):
that's the value you bring to apartnership, but that's the only
thing that you really know howto.
Or maybe you have access tocapital and you know someone's a
strong operator, and you know,maybe it's your own capital, or
maybe it's not your own capital,but you know, you know you could
have access to the capitalthat's interested in real
estate.
So those are usually the two biglike opportunities for co-GPs, I
(17:35):
think, is finding a deal orfinding equity in a deal.
SPEAKER_01 (17:40):
That makes sense.
Uh man, Brian, just as we wrapup, I think uh just kind of to
get give some, you know, wouldlove to hear kind of any stories
that you have on uh you know redflags that you've come across in
partnerships or or maybe anystories of lessons learned um
from a partnership that went badand maybe how you'd how you'd uh
(18:00):
change that around.
Any anything that comes to mindon that?
SPEAKER_02 (18:04):
Yeah, I think um man, I think uh spelling out the
roles and responsibilities inthe beginning is super
important.
Making sure everybody has a veryclear understanding of the
business plan, um stresstesting, all you know, any deals
to like worst case scenarios,best case scenarios, what
happens in those worst casescenarios, what happens if
(18:25):
there's extra capital, how arewe mitigating that risk to not
ha need extra capital?
Um I think uh deal structureworks.
What I've seen is just havinglow fee, like having low, like
make sure it's equity-based.
I I think I've seen where it'shigh fees have just killed a
(18:47):
deal, you know, where it'sdoesn't really make sense.
And then also under like ahaving a high level of
understanding of underwritingassumptions, I think is super
important.
Some people is like, oh, that'sgreat.
This is showing a 30% return or25% return, you know.
That that looks great on paper,but anybody can make numbers
dance on a paper.
(19:07):
You have to you have to reallyhave a good understanding of how
how you're getting to thisbusiness.
What are we assuming that isgoing to happen to make this
property successful?
What do we have to do to makethose assumptions?
So having a very goodunderstanding of that.
If someone doesn't have anunderstanding of that, that
would be a big red flag.
That's my biggest red flag.
That's right.
If someone doesn't know, yeah.
SPEAKER_01 (19:27):
So you in your opinion, especially really if
any if someone's going to be aGP with you, a general partner,
um, or you're doing any kind ofpartnership, you would want them
to, you know, let's say you gota new deal to your desk, you
would want to separatelyunderwrite these and come back
together, at least so they youknow what they would understand.
SPEAKER_02 (19:46):
I think that's a good practice, yeah.
Underwrit underwriting themseparately, or even just going
through the underwritingtogether and seeing what they
think is is feasible and howyou're coming up with those
assumptions.
SPEAKER_01 (19:58):
Yeah, that makes sense.
Yeah, I think I think that'sbig, and then I I think even
going back to what you said, umunderstanding the deal,
understanding incentives, andthen roles kind of laid out in
the operating agreement, reallybig options there.
And then I think just as as weas we wrap up too, I think one
big thing that I took away toois is just the fact of you know
(20:20):
you don't necessarily need moneyeither to to do deals, and I
think you've you've done thattime and time again, too.
Sounds like you may have anotherone coming up that uh you know
being a deal finder and beingthe one out there kind of
pushing the pedal to to bringopportunities to the table can
really set you in a spot whereyou can you can uh either have
equity in it in a deal or youknow be able to uh project you
(20:44):
into into future deals as well.
So I think that's great.
I think partnerships in generaluh are can be tough.
And uh, you know, I think peoplealways say like don't don't do
partnerships with family.
You do that and you it soundslike it goes really well.
Uh some people say don't dopartnerships with friends.
Um a lot of people would that Iknow do partnerships with
(21:06):
friends and they love it andthey wouldn't do it any other
way.
So I think going back to some ofthese building blocks, like you
said, of just understanding theroles, understanding incentives,
and then really as you know, aspeople anybody in the deal
should really understand whatthey're getting into and and uh
understand kind of how the dealwill work.
Worst case scenario and bestcase scenario.
So any any thoughts to wrap thatup?
SPEAKER_02 (21:28):
That that was a great recap.
I think that's that's perfect.
Um experience is important too.
Make sure like who's got theexperience in the certain
whatever whatever their theirrole is, that's great to detail
out the roles andresponsibilities and what type
of past experience does thatperson have in that asset class,
in that role, and how can theybring that to the table?
SPEAKER_01 (21:51):
Love it.
Well, thanks for tuning in foranother episode here, just
talking through deal structure,um part partnerships, and kind
of what what the benefits andand downfalls can be for that.
So, next episode we're gonna getinto uh into a few more kind of
details, and so appreciate y'alllistening in.
We'll see you next year.
SPEAKER_00 (22:09):
Thanks, guys.
Thanks, guys.
Again, thank you guys for tuningin.
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Welcome to Northwest Arkansas Investing Podcast, your
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SPEAKER_02 (00:12):
With your seasoned investor just starting out, we
bring you expert insights,market trends, and practical
strategies to help you buildwealth through real estate.
SPEAKER_01 (00:20):
From buying and selling to property management
and long-term investmentplanning, we cover it all so you
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Let's dive ahead.
SPEAKER_02 (00:30):
Welcome back to the NWA investing podcast with my
co-host Brandon Still.
Today topic we're talking aboutdeal structuring, effective
structuring for beneficialpartners.
So love it.
SPEAKER_01 (00:46):
Yep.
I think this is a this is areally good topic for a lot of
folks out there, whether they'rejust getting started or whether
they've been in it a long timeor even just kind of even if
they've invested as an LPlimited partner in uh in
previous deals, but maybehaven't seen what uh what
structuring partnerships lookslike um from the outside and
(01:07):
maybe from from others uh likeyourself, Brian.
And and uh and so yeah, I thinkwe're gonna we want to dive into
some of these topics um you knowand and really just kind of how
it evolves over largerpartnerships, you know, units or
deals that are you know 10million plus or let's say 20
plus units or or whatever, andthen even how it how Brian and
(01:29):
myself have have looked at dealsfrom a partnership perspective,
um, even when they're smallerand in two to twenty-four units,
if you will.
So um, so yeah, Brian, I'd I'dlove to dig into to some of
these topics.
When when it I think just somesimple terminology that you'll
hear from a lot of investors, Ithink would be good for those to
know what what is GP and LP?
(01:51):
You hear a lot of that out inthe market.
Um, investors will be talkingabout GPLP.
Just for those that don't knowthat, what does that mean?
SPEAKER_02 (01:59):
The general partners are the active partners in the
deal, they're the ones who aresetting up legal lending, asset
managing, constructionmanagement, um, and seeing the
property through.
And the limited partners are theinvestor partners.
They're gonna be limited intheir liability to the amount
(02:21):
they invest.
So they essentially, dependingon how you set it up, um,
usually will have no say in theproject.
So if you're an LP, youdefinitely want to understand
the structure, you want tounderstand the GP who the GPs
are on their deal, the deal,their track record, their
experience, their business plan,their underwriting.
(02:44):
Um, but yeah, so simple terms,general partners are the active
partners and limited partnersare the quote unquote passive
investor partners.
SPEAKER_01 (02:53):
Yeah, and limited partners, I think that yeah, I
think that's a good good way toput it, like you said.
Uh they're they're only limitedto their their liability and are
oftentimes silent partners, justthe money, right?
And and not necessarily have anysay in kind of what's going on.
Um so yeah, I think that's oneof the biggest building blocks
(03:14):
when it comes to uh dealstructure and kind of what
partnerships look like.
What what do you see out there?
I know this is gonna lookdifferent from smaller deals to
larger deals, but uh Brian, Iknow you've done both.
So what what is you know when itcomes to a smaller project,
maybe it's a duplex, maybe it'sall the way up to 24 units, or
maybe even a little bit bigger.
On smaller deals, what what aretypical partnership structures
(03:36):
that you've seen out there?
SPEAKER_02 (03:38):
Yeah, on the smaller deals, it I think it ranges
pretty pretty far from 50-50partnership where 50% of the
profits are going to the limitedpartner and 50% are going to the
active partners, to as high as90% going to the limited
partners and 10% going to themanaging partners.
(03:59):
So and then sometimes you'llhave fees on that fees paid to
the drilling partnership for uhall the work that they did
putting the deal together andall the deals that didn't come
together before that deal.
So me typically I I shouldgenerally charge no fees or very
low on my deal structures, butyou can see those as high as
(04:22):
five percent.
I I would be very hesitant toinvest in anything with with
higher than one to three percentfee.
You know, it is reasonable forthe general partners to put it
together, even though I don'tusually charge it.
Um it is a reasonable, uh it'sit's pretty common you see out
there.
Um and then yeah, for LP GPsplit, anywhere from 50-50 to
(04:48):
90-10.
You want to clarify with yourpartnership if your investment
is being paid back before that.
So if I'm investing$500,000 in adeal, am I is a profit structure
80-20 to me, 80% to me until Iachieve my capital back, or is
(05:11):
that after I achieve my get myuh capital back?
So, you know, as an investor, II also invest as a limited
partner too.
Um I would want my capital backbefore there's any sort of
profit profit share.
Yeah.
Another thing that is also outin the market is a preferred
(05:32):
return.
You know, that's more common inthe syndications where um you
know if I'm investing a hundredthousand, then and there's an
eight percent preferred return,that means that I'm getting
eight percent payback before anysort of splits, whether that's
70, 30, 80, 20, 90, 10.
SPEAKER_01 (05:52):
Yep.
And is that what kind ofdistributions would you normally
see on something like that on apreferred return?
Is that like a monthly or aquarterly, or is it on the sale?
SPEAKER_02 (06:02):
Yeah, monthly, quarterly.
It depends on the business, likedepends on the asset.
Usually existing, you're gonnahave a lot higher cash flow um
than um like a developmentproject where that's that
preferred return is probablyaccruing, where you know, you
don't have three years of cashflow.
So if you have a preferredreturn, that means that's
accruing to you.
(06:22):
Um you can get as complicated asyou want.
You could have 8% preferredreturn.
You can have uh waterfallhurdles where you know once the
investor achieves uh 16, 18,20%, then it goes to 50-50.
So it could start off as 8%preferred return, 60% to the
(06:43):
investor, 40% to the managingpartner, and then when they
achieve uh 18, when the investorgets 18%, then it goes to 50-50.
Um much those kind of waterfallhurdles and preferred returns
and fees are much more common onlarge deals, you know, where
it's five million and up, youknow, where you have a more
(07:05):
investors and maybe more generalpartners on the deal where
there's a little bit more workgoing in on that.
Um me typically it's usually at80-20.
Like my bread and butter is justan 80-20 straight split where I
don't charge any fees to thedeal, I'm getting I'm getting
20% quote unquote sweat equityfor putting the deal together
(07:26):
and managing it, and then myinvestors get 80%.
SPEAKER_01 (07:30):
Usually how so typically the way those are set
up, I know you know yourself asa as a GP or uh you normally
would be the deal finder andputting the deal together, and
normally, like you said, there'sthat sweat equity, or or maybe
you know, if you're let's sayyou're doing an 80-20 split, do
you typically as a GP or ifyou're getting the 20% split,
(07:52):
you know, just for those thatare like trying to figure out
how to set up theirpartnerships, is that typically
how the the initial investmentis as well, or is there you
know, let's give you an examplefor a million-dollar deal would
for the 250,000 that they needdown or whatever, would that be
evenly split?
Like the 80% partner would put80 per 80% of that 25%, and then
(08:16):
the other partner would put the20%, or how how do you normally
see like the initial investmenttoo?
SPEAKER_02 (08:21):
For me, it I'm usually not putting besides my
time and probably some money,like touring the property and
doing the due diligence on theproperty, you know, have some
kind of risk capital and andmaybe an earnest money deposit.
But for me, I I'm usually notputting like 20% of the required
(08:43):
capital, but you certainly youprobably you want to see the
general partnership having somesort of uh skin in the game,
especially if there's a fee.
If there's not a fee, then youknow, like for me, my argument
is I'm not getting paid until myif I don't have a fee, I'm not
getting paid till my investorsare getting paid.
So I'm essentially working forfree until my investors are paid
(09:06):
back.
But it's not uncommon for thegeneral partner to also invest.
If the general partner is alsoinvesting, usually you see that
they'll probably have a littlebit more of that 20% than maybe
that maybe their contribute isweighted towards that 80-22.
SPEAKER_01 (09:24):
That's a good point.
I think I think that's somethingto remember for those that you
know, maybe you're looking toyou you'd like to start in a
little bit higher bracket andmaybe not buy a duplex or a
four-plex or whatever, but you'dlike to buy some bigger deals
and but you don't necessarilyhave the cash to do so.
Really an opportunity for anyinvestor out there, if you want
to get start getting into thesebigger deals, is finding a way
(09:45):
to find the deals and put thedeals together and earn your way
into a spot.
And and I in my opinion, and youprobably say the same, uh, you
know, there's no reason to bescared to give up equity, I
guess, if you will.
Uh, you know, like your will- itsounds like your willingness in
some of these deals to give up agood portion of the equity, but
(10:06):
still get to have a piece justfor putting the deal together
and but not having to have theinitial capital investment, if
that makes sense.
SPEAKER_02 (10:12):
100%.
My and my pitch to uh like myinvestors who have you know
their own businesses that aremaking them multiple six figures
or multiple millions, theirtheir time is better spent
building that business thangoing chasing down a deal where
they may get they they're gonnakeep an extra 20%, but at the
same time, they're taking timeaway from their business, their
(10:34):
corporate ladder, their family,and they may not even achieve
the same return, they may noteven achieve the same uh profile
of returns as someone who's outthere has access to really good
deals, has a good team to manageand execute on operations where
(10:55):
they may end up making 10 or15%, where if they would have
invested with someone else, giveup some control, give up a
little like of the quote unquoteequity, but they usually you you
can make better return.
Just like just like a goodlender or a good CPA or a good
broker, you know, you're payingthat service to not have to do
(11:16):
it yourself.
You know, usually they'regetting that you're earning that
back.
SPEAKER_01 (11:20):
Yeah, that makes sense.
I love that.
Uh help walk me through some ofthese creative structuring and
options that you mentionedthere.
Some of these uh I'm not even asfamiliar with.
Um, so I'd love you to kind ofrun us through this.
SPEAKER_02 (11:34):
Yeah, so we have on here preferred equity, so that's
usually seen on much largerdeals, 5 million, 10 million.
That's something that comes inbehind preferred equity and
mezzanine debt.
Um coming in uh behind thelender.
So the lender might loan up youknow 65% or 70%, then you might
have preferred equity come inand lever it up to 80%.
(11:58):
So, you know, the bank's lendinguh$6.5 million, and then you
have an uh a preferred equitycome in for$1.5 million, and
then the investors are bringingin that extra$2 million, you
know, the equity.
So it'll sit in second positionabove your equity, usually it's
(12:19):
higher, it's a higherpercentage, usually it's
anywhere from 12 to 16 percent,but it's a set return.
So you know the argument to usepreferred equity is if I can
make above 12 to 16 percent onmy real estate deal, which you
should, you I mean, I'm notgonna do a deal if I think I'm
making 12 or 16 percent.
I I I would I I try to go foryou know twenty percent net to
(12:42):
my investors at least for me todo a deal on an annual basis.
But if you're making above that,then theoretically it makes
sense to pay that out.
But you want to be carefulbecause sometimes a preferred
equity will also have additionalfees.
Obviously, your lender has fees,though those can range quite a
bit, but the preferred equitywill have a little bit of fees
(13:03):
and then which adds extra stressto the deal.
Any fees to a deal adds stressto a deal.
That's money that's not goingback into the property, that's
money that's just going to yourbasis.
Now that's you're gonna have torecoup that on the sale by
forcing the appreciation uhversus money in a cap money
towards capex or money towardsthe property, that that's
(13:24):
immediately going to the value.
So it's also another partner inthe deal, um, but it can help on
larger deals and um can help thereturns.
So I I would just be careful onthat.
You know, some of those guys areuh you want to be careful with
on on how they structure it ifthey have takeover rights like
the lender, so um, it's justanother tool to use for the
(13:47):
larger deals.
SPEAKER_01 (13:48):
Yeah, that makes sense.
And then one that's standing outto me here is is code GP
partnerships.
Um for you, does it is thattypically, you know, like let's
just say it's a 50-50 split, oris that where there'd be code
GPs and LPs in the deal?
What do you where do younormally see that play out?
SPEAKER_02 (14:05):
Yeah, so you know, previously I was with a
syndication company for a coupleyears.
That was much more common in thelarger deals when a when a
syndicating deal is where it's a$20 million deal and you're
gonna have to raise five millionfive million dollars, and you
know, you have a couple partnersthat bring in additional
(14:26):
capital.
So you have access to a milliondollars of capital.
Sometimes they'll get a piece ofthe GP.
You know, that you're supposedto have other roles besides just
raising the capital.
You know, maybe they have someasset management experience,
some marketing experience.
So that 20 to 40 percent that'scarved out for the GP, sometimes
that's not just one GP, that'smultiple partners.
(14:47):
One partner might be boots onthe ground, one partner might be
um raising the equity, onepartner might be leading
construction and assetmanagement.
So that 20 to 40 percent can becarved up between the different
GPs and their responsibilities.
Gotcha.
Definitely want to be clear withthose roles and
responsibilities.
(15:08):
You know, there's a developmentproject I'm looking at in uh
here in Arkansas, and you know,one of the partners wants to
kind of lead the construction,and then one of the other
partners wants to lead thefinancing and the asset
management and the operations.
Um just make sure you have thosespelled out, you know, because
(15:32):
it's all good until you, youknow, when you close the deal,
and then some people have otherpriorities, and um you want to
make sure it's really spelledout and up and an operating
agreement.
So have a good attorney and makesure everybody's on the same
page at the at the beginning.
SPEAKER_01 (15:47):
Yeah, that makes sense.
Seems like those could, youknow, you definitely want to
make sure you have the rightpartners if you're gonna be
co-GPs with them, becausethere's a lot of
responsibilities involved, andand uh so good.
SPEAKER_02 (16:00):
Yeah, and make sure you're adding value to each
other and and make sure you'renot partnering up, just a
partner.
You know, I see a lot, and onthe other token, I see a lot of
newbies like wanting to partnerup, you know.
Yeah, it's like two newbiesaren't really adding, but yeah,
that's great.
You're both exciting andlearning about real estate, but
I would probably advise maybeyou guys just uh you know, quote
(16:20):
unquote pick each other brainsand stay in touch, but um you
want to have some uh added valueto the partnership.
SPEAKER_01 (16:28):
Yeah, yeah.
For those for those, I guess,newbies, if you will, you think
there's more value in themtrying to go, you know, find a
way to do their own first dealat least, and then getting into
a partnership afterwards, andthat way they have at least some
experience to be able to do intoa partnership and see you know,
want the same out of theirpartner.
Is that kind of what you wouldrecommend?
SPEAKER_02 (16:48):
I think so.
I think it'd be good it's goodexperience.
You can, you know, I'm not I Isay starting small is good.
I'm not like you have to buy abig deal your first deal.
Like I I think starting smallhas a lot of value and putting
together a deal and seeing it,you know, it it falls on you.
But at the same time, there isvalue, and even if you are a
newbie, maybe you're the onefinding the off-market deal, and
(17:11):
that's the value you bring to apartnership, but that's the only
thing that you really know howto.
Or maybe you have access tocapital and you know someone's a
strong operator, and you know,maybe it's your own capital, or
maybe it's not your own capital,but you know, you know you could
have access to the capitalthat's interested in real
estate.
So those are usually the two biglike opportunities for co-GPs, I
(17:35):
think, is finding a deal orfinding equity in a deal.
SPEAKER_01 (17:40):
That makes sense.
Uh man, Brian, just as we wrapup, I think uh just kind of to
get give some, you know, wouldlove to hear kind of any stories
that you have on uh you know redflags that you've come across in
partnerships or or maybe anystories of lessons learned um
from a partnership that went badand maybe how you'd how you'd uh
(18:00):
change that around.
Any anything that comes to mindon that?
SPEAKER_02 (18:04):
Yeah, I think um man, I think uh spelling out the
roles and responsibilities inthe beginning is super
important.
Making sure everybody has a veryclear understanding of the
business plan, um stresstesting, all you know, any deals
to like worst case scenarios,best case scenarios, what
happens in those worst casescenarios, what happens if
(18:25):
there's extra capital, how arewe mitigating that risk to not
ha need extra capital?
Um I think uh deal structureworks.
What I've seen is just havinglow fee, like having low, like
make sure it's equity-based.
I I think I've seen where it'shigh fees have just killed a
(18:47):
deal, you know, where it'sdoesn't really make sense.
And then also under like ahaving a high level of
understanding of underwritingassumptions, I think is super
important.
Some people is like, oh, that'sgreat.
This is showing a 30% return or25% return, you know.
That that looks great on paper,but anybody can make numbers
dance on a paper.
(19:07):
You have to you have to reallyhave a good understanding of how
how you're getting to thisbusiness.
What are we assuming that isgoing to happen to make this
property successful?
What do we have to do to makethose assumptions?
So having a very goodunderstanding of that.
If someone doesn't have anunderstanding of that, that
would be a big red flag.
That's my biggest red flag.
That's right.
If someone doesn't know, yeah.
SPEAKER_01 (19:27):
So you in your opinion, especially really if
any if someone's going to be aGP with you, a general partner,
um, or you're doing any kind ofpartnership, you would want them
to, you know, let's say you gota new deal to your desk, you
would want to separatelyunderwrite these and come back
together, at least so they youknow what they would understand.
SPEAKER_02 (19:46):
I think that's a good practice, yeah.
Underwrit underwriting themseparately, or even just going
through the underwritingtogether and seeing what they
think is is feasible and howyou're coming up with those
assumptions.
SPEAKER_01 (19:58):
Yeah, that makes sense.
Yeah, I think I think that'sbig, and then I I think even
going back to what you said, umunderstanding the deal,
understanding incentives, andthen roles kind of laid out in
the operating agreement, reallybig options there.
And then I think just as as weas we wrap up too, I think one
big thing that I took away toois is just the fact of you know
(20:20):
you don't necessarily need moneyeither to to do deals, and I
think you've you've done thattime and time again, too.
Sounds like you may have anotherone coming up that uh you know
being a deal finder and beingthe one out there kind of
pushing the pedal to to bringopportunities to the table can
really set you in a spot whereyou can you can uh either have
equity in it in a deal or youknow be able to uh project you
(20:44):
into into future deals as well.
So I think that's great.
I think partnerships in generaluh are can be tough.
And uh, you know, I think peoplealways say like don't don't do
partnerships with family.
You do that and you it soundslike it goes really well.
Uh some people say don't dopartnerships with friends.
Um a lot of people would that Iknow do partnerships with
(21:06):
friends and they love it andthey wouldn't do it any other
way.
So I think going back to some ofthese building blocks, like you
said, of just understanding theroles, understanding incentives,
and then really as you know, aspeople anybody in the deal
should really understand whatthey're getting into and and uh
understand kind of how the dealwill work.
Worst case scenario and bestcase scenario.
So any any thoughts to wrap thatup?
SPEAKER_02 (21:28):
That that was a great recap.
I think that's that's perfect.
Um experience is important too.
Make sure like who's got theexperience in the certain
whatever whatever their theirrole is, that's great to detail
out the roles andresponsibilities and what type
of past experience does thatperson have in that asset class,
in that role, and how can theybring that to the table?
SPEAKER_01 (21:51):
Love it.
Well, thanks for tuning in foranother episode here, just
talking through deal structure,um part partnerships, and kind
of what what the benefits andand downfalls can be for that.
So, next episode we're gonna getinto uh into a few more kind of
details, and so appreciate y'alllistening in.
We'll see you next year.
SPEAKER_00 (22:09):
Thanks, guys.
Thanks, guys.
Again, thank you guys for tuningin.
I'm gonna go ahead and uh listsome sponsors off here.
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