Every JV shop wants a track record and a 10% co-invest I don't have

Question

24 unit building under contract, needs about $1.8M of equity. I've talked to four capital providers now. Two want three comparable completed deals with audited statements. One offered 90/10 but wants me to put up 10% of the equity, which is $180k, and I don't have $180k sitting free after the deposit and the pre-closing costs. The fourth wanted a promote structure where I see nothing until they hit a 15% IRR, which on my numbers means I work three years for fees.

I can execute this deal. I've done smaller ones. What do people in my position actually do about the co-invest problem, and is there a way to show capability that isn't audited financials I've never had prepared?

dpatel_re · Answer

The co-invest ask isn't really about the money at $180k on a $1.8M raise. It's about whether you feel the downside. Some providers will take a reduced co-invest, say 3% to 5%, and price it back out of you with a lower promote or a higher pref, so run both versions and see which one you'd rather live with. On the track record side, what I'd want instead of audits is your last two deals laid out with the original underwriting next to actuals, including the line items you got wrong. An operator who shows me a $40k variance on turn costs and explains it is more credible than one with clean statements and no story.

angela_burke · Answer

Whatever you agree, price the reporting before you sign. A provider on a negotiated deal will want a monthly package with variance against the approved budget, and my small team could not produce that on the bookkeeping we had. Decent property level bookkeeping with a monthly close ran us a few hundred a month, and the investor reporting sat on top of it. If you promise monthly and deliver quarterly spreadsheets, the relationship is over before the renovation is.

ryanmck27 · Answer

The 15% hurdle before you see anything is the one I'd push hardest on, not the co-invest. Ask for a second tier so something breaks loose at 10% or 11%, even a small slice. Otherwise a decent-but-not-great outcome pays you nothing after three years and you'll take the next deal from whoever offers you a fee, which is exactly the misalignment they say they're worried about. Separately, if you're thinking about raising the $180k from friends to fill your own co-invest, talk to a securities lawyer first, because that's a different animal from the JV itself.

Every JV shop wants a track record and a 10% co-invest I don't have

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