LP equity for sponsors.
Joint venture LP equity for middle-market real estate, raised deal by deal or as a program. Typical checks are $5 million to $50 million.
What is LP equity?
LP equity is the limited partner capital in a real estate deal. In a joint venture, one investor or a small group provides most of the equity, up to 90% of it. The sponsor provides the rest as the GP, runs the deal and earns a promote if it performs.
JV LP equity differs from a syndication, where the sponsor raises smaller amounts from many investors. A joint venture has one LP relationship, one negotiation and one set of documents.
LP equity vs co-GP equity
| LP equity | Co-GP equity | |
|---|---|---|
| What it funds | Most of the deal's equity, up to 90% | The GP's co-invest, usually 80 to 90% of it |
| What it earns | A preferred return and a profit split | Its share of returns plus part of the promote |
| Role | Passive investor with major-decision rights | Partner at the GP level with approval rights over major decisions |
| Cost to the sponsor | The LP's share of profits | About 25 to 50% of the promote |
Most sponsors need both. We raise the LP equity and the co-GP equity for the same deal.
One deal or a program
We raise LP equity for a single deal or as a program. Programmatic LP equity is one LP investor committing to a sponsor's next several deals under terms agreed at the start.
What we raise LP equity for
Multifamily is the largest category: acquisitions, value-add and ground-up development. We also raise LP equity for senior housing, build-to-rent, net lease development, grocery-anchored retail, medical office and outpatient buildings, small-bay industrial, student housing and select hotel, storage and other deals. See all asset types and multifamily.
Who the LP capital comes from
Family offices, private equity funds, pensions, insurance companies, endowments, foundations, hedge funds, asset managers and high net worth individuals.
How the equity splits in a joint venture
Take a $100 million acquisition financed with a $65 million loan and $35 million of equity. In a typical joint venture the LP funds 90% of the equity and the GP funds 10%.
| Layer | Amount | Who provides it |
|---|---|---|
| Senior loan | $65.0 million | Lender |
| LP equity | $31.5 million | JV LP investor |
| GP co-invest | $3.5 million | Sponsor, or sponsor plus a co-GP partner |
The $3.5 million GP check is where many sponsors run out of room. A co-GP partner can fund 80 to 90% of it.
How the LP gets paid
JV LP terms are usually written as a preferred return followed by a promote. An example with an 8% preferred return and an 80/20 split:
- Cash first goes to the LP and the GP in proportion to what they invested, until each has received an 8% annual return and its capital back.
- Profit above that is split 80% to the investors and 20% to the sponsor as its promote.
In our illustration a deal earning a 2.2x gross return over five years delivers about 1.95x net to the LP after the promote. Actual structures vary: some have more than one hurdle, and the split at each hurdle is negotiated.
What a JV LP negotiates besides economics
- Major decisions. Sale, refinancing, the annual budget and large leases or contracts need the LP's approval.
- Removal rights. The conditions under which the LP can replace the sponsor as manager.
- Buy-sell and forced sale. How the partners part ways if they disagree.
- Capital calls. What happens if the deal needs more money and one side does not fund.
- Guarantees. The sponsor usually signs the loan guarantees; the LP does not.
- Reporting. Monthly or quarterly financials, and audit rights.
JV LP equity or syndication
| JV LP equity | Syndication | |
|---|---|---|
| Investors | One, or a small group | Many |
| Check size | $5 million to $50 million on the deals we raise | Small individual checks |
| Negotiation | One | A standard offering |
| Control | LP has major-decision rights | Sponsor has broad control |
| Speed once the relationship exists | Fast | Depends on the raise |
Sponsors often start with syndication and move to joint ventures as deals get larger.
How we raise it
- Review. Track record, the deal and the capital structure.
- Package. A short summary investors can read in five minutes, with the model behind it.
- Placement. We take it to the LP investors whose mandate fits the asset type, strategy, check size and market.
- Terms. Term sheets, then a choice of partner.
- Close. Joint venture documents alongside the loan.
What LP investors want to see
- A realized track record in the same strategy, as principal.
- Basis against recent sales, and against replacement cost for new construction.
- Projected rent growth and the evidence behind it.
- The exit cap rate against where similar properties trade today, with returns shown at wider caps.
- The sponsor's cash co-invest in dollars.
- Fees, the promote and the waterfall.
- Deal status: site control, approvals, debt quotes and equity already committed.
Send these with the deal and the first conversation with an investor goes faster.
Questions sponsors ask.
What is LP equity in real estate?
The limited partner capital in a deal. In a joint venture, one investor or a small group provides most of the equity and the sponsor invests alongside as the GP.
How large are the LP checks you raise?
Typical checks are $5 million to $50 million.
Do you raise LP equity deal by deal or as a program?
Both. We raise joint venture LP equity for a single deal or as a programmatic relationship covering a sponsor's next several deals.
How much does the sponsor have to invest alongside the LP?
LPs typically expect the GP to invest 10% of the equity. A co-GP partner can fund most of that.
Do you also raise the co-GP equity?
Yes. We place co-GP partners who fund 80 to 90% of the GP co-invest, on the same deals.
How much of the equity does a JV LP provide?
Typically most of it, up to 90%. The sponsor funds the rest as the GP co-invest.
What return does a JV LP receive?
Usually a preferred return and then a split of the profit. Terms are negotiated; an 8% preferred return with an 80/20 split is one common example.
What is the difference between JV LP equity and syndication?
A joint venture has one LP, or a small group, writing a large check with major-decision rights. A syndication raises smaller checks from many investors.