Who is your partner?

Before I get into the team on the next real estate deal… Monday, April 8 is the day of the Eclipse in our area of New York.

It’s turned into a “thing” for schools, employers and any organization that scheduled an event on April 8th. They have been scrambling with the uncertainty of this distraction.

Many people are heading to “preferred” destinations to get the full 4-minute experience.

Gretchen and I were in our back yard with our “eclipse” glasses and our dog, “Rocky.”

THE CAPITAL STACK

Throughout the majority of my career, I had 2 partners. My friend Greg and my brother Mike.

If financing is utilized, the lender is another partner. Usually a significant partner!

In a Syndication model, we have Limited Partners also known as Passive Investors. The partners make up the Capital Stack. The Capital Stack funds the down payment, closing costs, and necessary capital improvements, if any. Our Passive Investor partners make up the common equity.

All the partners are not created equal! It depends on their position on the Capital Stack. The players in the Capital Stack are as follows:

1. Common Equity

2. Preferred Equity

3. Debt

The lender typically enjoys the senior debt position. The lender is paid periodically based on the agreed upon note payable to the bank, usually a monthly payment. This must get paid or the bank can take back the property. The lender has first position at all times. Once the property is sold, the lender is paid at the time of the transaction.

The preferred equity position is not as prevalent as the debt partner. Preferred equity offers a “hybrid” risk/return profile. Preferred equity carries payment priority over the common equity and shares some of the upside return at the exit. Preferred equity receives a return that exceeds the debt partner, but less than the common equity partner.

Compensation percentages is based on the overall risk profile for each partner.

The common equity is typically offered a preferred return. To be clear, Preferred equity is not directly related with a Preferred Return.

The preferred return allows the common equity payment priority ahead of the General partners. The General Partners are not paid anything until the preferred equity payments are satisfied in any payment period.

The General Partners are operating the deal and are compensated based on finding, funding and operating the project.

As a General Partner, I also participate as a Limited Partner. If I’m raising capital for a project, I will be investing my personal capital!

Our Partnerships are created based on the relationships we have formed with our lenders and investors.

We Thank You for your partnership!

Regards,

Bill

REAL ESTATE LINGO

Capital Stack - The risk profile, priority of payment and associated return metric for each partner’s investment.

Risk profile - The evaluation of risk associated with an investment