This chapter dives into the various equity investment structures Sam will be considering as he explores opportunities with the investors we met in Chapter 2. These will include structures that focus on equity for Washington Place and structures that will provide him funding for future real estate investments that are similar to Washington Place.

We will generally explore four different investment options:

• Joint ventures, including platform investments, co-GP investments and propco “seed” investments
• Single-asset syndicate
• Private REIT
• Private fund

While we will review all the various real estate investment structures, we will focus primarily on two: single-asset syndicates and joint ventures, as these are most relevant to Sam who is still relatively early in his career as a GP and will provide him optionality to scale slower with better fees or faster with reduced fees.

Single-asset syndicate

Single asset syndicates are the standard path to building a Sam’s track record, raising on a “deal by deal” basis where the returns and fees are never crossed with other real estate investments.

For raising a single asset syndicate we’ll be targeting Allie, the Accredited Investor and Fred, the Family Office Investor.  How long it takes Sam to raise the syndicate will vary depending on the strength of his relationships and could potentially require lots of hand holding and mass outreach.

Sam will be targeting a standard LP structure: 5-8% preferred return with a profit share of 20% along with asset management and acquisition fees. If he is focusing more on Allie and other individual accredited investors, then he will be marketing higher IRRs and shorter hold periods. If he is targeting Fred and other family office investors, he will be marketing cash flow and tax benefits of a longer-term hold, including 1031 exchange opportunities.

The process for Sam to structure a single asset syndicate is pretty straightforward:

• Form legal entity (LLC or LP)
• Draft syndicate agreement
• Create PPM / investment memo (comply with offering exemption requirements)
• Accredited investor validation and outreach
• Get signed subscription agreements + capital
• Close

Joint Ventures

Joint ventures are partnerships between sponsors like Sam and institutional investors like Ralph, Hazel, and Fred (Fred does not necessarily manage institutional capital but often behaves like one when his AUM is in the billions). The institutional investors will partner with Sam if he has a compelling investment strategy that he is uniquely qualified or capable of executing–in this case the ability to acquire small multifamily projects and operate them as extended stay units. But each will be looking at the joint ventures through a different lens:

• Ralph – deliver a specific return profile in target asset classes using leverage to enhance IRR, wants to be able to deploy $100mm+ at scale, often much more
• Hazel – usually more esoteric, focused on aggressive return profiles in shorter periods, markets-driven, like complex financial instruments using lots of debt; also needs to deploy lots of capital
• Fred – highly flexible, can invest in strategies that require long-term holds (especially good for emerging asset classes); can be more flexible on capital deployed (and bring in other families)

These joint venture partners are not your typical limited partner or “LP”, as they are investing money on behalf of their own LPs – large institutional investors–and have to deliver their LPs their own target returns. So JVs will require more aggressive fee structures with Sam:

• Minimal to no asset management fee (1% at best)
• Higher preferred returns, e.g., 10-12% instead of 8%
• Lower profit shares (e.g., 85/15 instead of 80/20) – but can get more aggressive over higher returns

Sam will also work with Ralph, Hazel and Fred to explore alternative, and oftentimes more flexible joint venture structures, including:

• Platform investments – provides investment at the holding company level to provide capital to both Koala Capital, Sam’s operating company, and for the acquisition of Washington Place and other assets
• Co-GP investments – provide working capital for the GP to invest in deals and pursuit costs in exchange for equity in the GP (Co-GP investors are investors specialized in taking part of the GP commitment in a deal in exchange for LP economics and a portion of the GP’s promote)
• PropCo “Seed” investments – provide the initial $10-20mm to build out an investment track record quickly but with very aggressive fees and rights to invest in future real estate fundraises at attractive terms

Finally, to determine which investors and investment structures make the most sense to pursue, Sam will ask himself the following six questions:  

• (1) “What’s my track record as a GP?”
• (2) “How large are my capital needs for my current project(s)? And (3) how much personal capital can I co-invest?”
• (4) “How robust is my investor network?  And (5) have I made them money before?”
• (6) Lastly, “How important is an ongoing relationship with the investor?”

Once we can answer these questions, Sam will be ready to start his real estate capital raising journey.  

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