In the world of real estate investing, structuring a partnership can be as critical as the deal itself. Whether you are a first-time investor or a seasoned buyer, understanding how to effectively structure your partnerships is key to success. This post will break down the essentials of structuring joint ventures (JVs) and syndications, using a 70/30 split method, and provide insights on creating equitable partnerships. —
Introduction to Partnership Structures
If you’re curious about structuring a partnership for a new real estate deal, this guide is for you. Whether through joint ventures with two to six partners or a syndication, the same foundational method applies: a 70/30 equity split. This post will guide you through the process, ensuring you have a clear understanding to navigate your next acquisition.
Understanding the 70/30 Split
In both syndications and JVs, the equity is typically structured as a 70/30 split. –
70% Equity for Capital Contributors: This portion is reserved for those providing capital. This could include yourself and any passive partners. – 30% Equity for Active Management: This is allocated for those actively managing the deal. It includes roles in asset or property management and day-to-day operations.
Joint Ventures: A Closer Look
In a joint venture scenario with five partners, the distribution is straightforward: – Two partners might have conducted the primary legwork, taking on significant roles such as research, negotiation, or finding investors. Hence, they might command a larger share of the 30% active management bucket. – New partners bringing in capital can also receive a share based on their contributions and involvement.
Syndications: A Complex Structure Simplified
With syndications, the structure remains similar, with the potential inclusion of limited partners who contribute financially but may not have an active role. Managers in syndications can still maintain control over their share of the 30%, rewarding them for steering the deal’s operational aspects. —
Utilizing an Equity Split Spreadsheet
An essential tool in structuring deals is an equity split spreadsheet. Here’s how it works:
1. Input Your Deal Details: Enter the equity raise, purchase price, and other financial details.
2. Allocate the 70/30 Split: Keep the split constant, with 70% for capital contributors and 30% for managers.
3. Divide Responsibilities Into Buckets: Areas such as sourcing, contracting, risk capital, and asset management each have designated percentages.
Adjusting Bucket Allocation
Adapt the equity allocation in each bucket depending on the deal specifics, such as:
– Risk Capital: High deposits might necessitate a larger equity allocation.
– Capital Raising Challenges: Hard-to-raise funds might lead to a higher percentage to compensate those working to secure them.
– Balance Sheet Guarantor: Consider the risk involved in signing loans when allocating percentages.
Legal Considerations and Final Thoughts
Regardless of the structure—JV or syndication—legal documents are crucial:
– Operating Agreement: Must clearly define roles, voting rights, and decision-making protocols.
– PPM and Syndication Documents: Necessary for syndications, detailing investment agreements. Remember, every deal is unique, and so too should be your approach to structuring partnerships. An acquisition fee can be part of the agreement to compensate those who put the deal together, maintaining transparency and fairness. As you move forward, continuously refine your strategy and seek guidance from established real estate attorneys to ensure the best possible outcomes for all partners involved.
Conclusion
With these insights, structuring your next real estate partnership can be a transparent and fair process. By understanding and implementing the 70/30 split, creating detailed operating agreements, and considering all partners’ contributions, you set a solid foundation for success and growth in your real estate ventures. Stay committed to enhancing your skills and sharpening your axes for your investing journey. Reach out, get involved, and remember—you’re building toward your personal empire, one deal at a time!
