Great video as always Justin! This seems to apply to purely an acquisition scenario. What does the capital stack look like in ground-up development or value-add investments, when construction/capex costs make up a large portion, or a majority, of the capital uses?
Hi Justin, another great video. Your videos have helped me so much these past few months as I will be trying for an internship in the CRE field next summer. I was wondering if common equity sources are typically searched for before mezzanine debt or is there no concrete order to whether mezzanine debt or common equity is acquired first?
I believe typically only the GP's equity is entitled to promote if they achieve a return above and beyond the hurdle rate/preferred return. I worked for a family office and we were LPs in many RE funds. I never saw a scenario where LPs/pref equity were directly entitled to promote. I'm sure it happens though, financing can get creative haha, but it's just not typical and/or industry standard. The only scenario I can think of a LP/pref equity investor receiving promote is if they also had economic interest in the management company. This may be the case if the management company was just starting and needed "seed funding" to get off the ground. While not directly receiving promote from the fund, LPs would receive it from the management company funding the GP equity, the GP receiving promote, the promote flows back to the management company, and then the LP would receive it that way (again, pretty atypical). Hope that helps!
promote is the LPs way of sacrificing some cash in order to ensure the GP is motivated/incentivized to maximize the property’s profitability. Imagine if someone asked you to finish a major project within 30 days. If you complete it on time you would be rewarded $10K if you don’t then you get nothing. Chances are you’ll do everything in your power to complete it for that $10K but if you weren’t incentivized with a payment perhaps you now care less about getting it done quick
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