How do partners in a commercial real estate investment get paid?
Sorry dumb question but I’m looking for some examples of how partners get paid in a commercial real estate investment. I have very little liquid cash but great resources and can get a lucrative commercial real estate deal done and manage the property. One or two of my friends want to invest cash to help with financing the purchase. What are some ways to structure the deal with my partners for payouts and return on investments, etc. Obviously we have to pay the mortgage payment on the commercial loan but do we do a percentage based split of the remaining net profit? Sorry, very new to all of this and appreciate any/al insight!
[{"id": "e8w8l1o", "text": "What type of property is it? Whats the rough in place NOI? What are the equity splits between you and your friends? Are you familiar with waterfalls? If not, i would highly recommend googling \u201creal estate investment waterfall\u201d or \u201cinvestment waterfall\u201d and model it after that. . ", "replies": [{"id": "e8zfu2a", "text": "Thanks for the tip. I have been researching the waterfall model after your post! While it is great for distribution of cash flow, one thing I don\u2019t see addressed so far and hopefully you can help is, how the equity ownership of the property is divided among investors. For instance, if there are 4 investors and myself the sponsor/manager, how would the ownership equity in the property look like if/when  the property sells? Furthermore, should the ownership of the property be how we structure the ownership/share percentage of the LLC? ", "replies": [{"id": "e9gvy49", "text": "Generally, you and your investors would have an Operating Agreement which would dictate the upfront capital contribution from each party and the distribution to each party upon a transaction such as a sale.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "e8w9fxl", "text": "Hi, thanks for the tips. I will look up waterfall. It\u2019s a warehouse type commercial building. Rough NOI is about $125k a year. Determining the equity splits is one of the issues I\u2019m having. I am putting together the deal, will manage the property, and have a 10-15 year tenant ready with a LOI. Thanks again", "replies": [{"id": "e8wkxcw", "text": "You need a good real estate lawyer.  You should be charging a management fee, an acquisition fee, a refi fee, a leasing fee,  and a dispo fee.  All those things take time and effort. That is why you pay the investment/property manager.  You could do a multi-tier waterfall but I would suggest you just split profits above some level of return.  You get 10% of cash flow above an 8% cash on cash return or something like that.  Its easier to explain to less savy invrstors.", "replies": [{"id": "e8xsmu7", "text": "So once investors get an 8% return monthly on their investment, my cut is 10% of the remainder? What happens to remaining cash flow?  ", "replies": [{"id": "e8zf6y2", "text": "It goes to the investors", "replies": [], "depth": 4}], "depth": 3}, {"id": "e8zg0dt", "text": "OP shouldn't feel obligated to charge his friends with fees (esp acq fee) if he wants the experience. \n\nIf he is procuring funds from other investors, I'd say go for it if you have the experience. ", "replies": [], "depth": 3}], "depth": 2}, {"id": "e9aculw", "text": "I heard some really good Bigger Pockets podcasts on this subject. How to distribute the proceeds and the waterfall, etc. If you go on their message board you'll probably find good information there. \n\nI remember the guest was doing it very simply. Everyone got the same, he didn't do waterfalls. ", "replies": [{"id": "e9amvt9", "text": "Wow thank you. I\u2019ll check this podcast out!", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "e8zfv60", "text": "Most people do distributions quarterly (Jan 1, April 1, etc) on the promised preferred return. \n", "replies": [{"id": "e8zi9qz", "text": "Thank you for the tip! Any others would be appreciated ", "replies": [], "depth": 2}], "depth": 1}, {"id": "e8zuf6f", "text": "There are countless ways to structure deals and rarely are any two deals exact.  Sounds like you want to be the \"Sweat Equity\", you are the one putting in all the sweat.  Your friends appear to be the Equity since they are putting up the equity.  Both sides need to appreciate the other.  If the Equity does not appreciate the Sweat or visa versa you will have problems.  Do your best to keep it simple (KISS).  Be very careful of preferred returns.  You could wind up in a situation years from now where you have done a great job and by no fault of yours, you get nothing.  Likewise, the Equity needs to be appreciated and projections should provide them with a competitive ROI.  If you are the PM then you need to be paid a PM fee.  If you dont understand or are not an experienced PM then you should charge a lower fee than a professional.  If you are not experienced, you will make mistakes that cost you and the Equity money.  All mistake cost money, all!  \n\n&amp;#x200B;\n\nA simple structure for your deal would look like this:  85%/15% split.  Equity gets 85% of distributable cash flow and 15% to the Sweat Equity (you).  After all invested capital has been returned then it \"flips\" to something like 70%/30% however, this is where you can insert a \"Pref\" return.  If you can avoid a Pref you should.  Hope this helps gets you started.\n\n&amp;#x200B;\n\n&amp;#x200B;", "replies": [], "depth": 1}]