How should I split ownership with a money partner?
Short answer
Start with a preferred return for the money partner, then split the back end profit. In my deals the money side usually wants at least half of that profit. The rest is split with your partners. On bigger institutional deals, your share can often shrink to around 20 or 30 percent. Many sponsors talk to a securities attorney about how to document the final terms.
Think about the split in two layers. The first layer is the preferred return. The second layer is the back end profit, which I call the promote. Most of the confusion I hear comes from mixing these two together.
The preferred return comes first
The person who puts in the money will usually want to be paid for the time their money is deployed. That is how I have seen most deals structured. On a mixed-use project, a preferred return I have used is 8%. That means $80,000 a year for every million invested.
Only after that is paid do you get to the profit split. So the first question is not who owns what percent. It is what the money earns before anyone else shares in the upside.
Splitting the back end profit
Here is how I explain the back end in the webinar.
"Typically the money will want at least half of the back end profit. So that just gets given to whoever provided most of the money."
The remaining profit is split between you and your partners in various ways. Most of my deals have been about a 50/50 split with my partners. As deals get bigger and more institutional, in my experience 20 or 30 percent of the back end is common. That can still be worth it. On a deal with $10 million in profit, a smaller percentage is still a large number.
This clip walks through the preferred return and the back end split with the actual numbers.
Summary and key takeaways from this video
Splitting the fees and the GP equity too
Ownership is not only the profit split. In my deals we also split the developer fee. The GP side of the equity contribution was split as well. In one industrial deal the partner provided the debt and equity, I was the boots on the ground, and the LP capital came in at a 7% return. We split the promote above that.
I also delineate responsibilities up front. Someone owns the deal and the local work. The other side owns the capital and often signs on the debt. When the roles are clear, the split is easier to defend.
My first deal broke the usual pattern
On my first co-GP deal, my partner took a different route. He set a very high preferred return because it was our first deal together. Then he skipped the typical waterfall and I got 100% of the promote after the pref. He did it to reduce the risk on his own return.
Here I tell the story of that first deal and how the structure played out.
The deal ended up with a 78% IRR. I made about twice what he did, even though he put in all the money and signed on the debt. We still joke about it. The lesson I take from it is that the structure should match who carries which risk. A guaranteed-style return and a bigger share of upside are different trades.
These numbers are from my own deals. Yours will depend on the asset, the partner and the market. Many sponsors talk to a securities attorney about the structure before they sign anything.
From the Family Office Club stage
Here is one way I have set it up when a single investor funded the whole deal. Any distributions went first to that investor until they had every dollar of their money back in their pocket. Then the money came back to my side, so my capital was returned too. Only after both of those steps did we split the remaining profit based on the equity split in the deal. Spelling out the order of who gets paid first is what keeps the conversation with a money partner simple and fair.
On the record
- An 8% preferred return on a mixed-use project pays $80,000 per year for every $1 million invested.
- On larger institutional quality deals, Richard has seen the sponsor's share of the back end shrink to around 20 or 30 percent instead of 50/50.
- Richard's first co-GP deal gave him 100% of the promote after a high preferred return and finished with a 78% IRR.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: Joint Venture & Co-GP Webinar - How to Close Deals with Peers & Partners in the Family Office Club, Joint Venture & Co-GP Webinar - How to Close Deals with Peers & Partners in the Family Office Club. Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around promote and waterfall terms, co-GP fee splits and deal structure documents. Do not use AI to write your own legal agreements.
Next moves
- Decide what preferred return the money partner needs and write it as a yearly percent.
- List who does what, including who signs on the debt and who runs the project.
- Agree how the developer fee and the GP equity contribution are split.
- Propose a back end split, starting from the money side wanting at least half.
- Consider talking to a securities attorney about the final structure before anyone signs.
People also ask
What is a promote?
It is the back end profit left over after the money partner receives the preferred return. That leftover profit is then split up in different ways between the money and the other partners.
What preferred return is typical?
On a mixed-use project I used 8 as the example, which pays $80,000 a year per million invested. In one industrial deal the LP capital came in at 7%.
Should the split change on bigger deals?
In my experience yes. On larger institutional quality deals, 20 or 30 percent of the back end is common in my experience, versus about 50/50 on many of my smaller deals.
Related questions
- What is a co-GP in real estate?A co-GP in real estate is a second party who shares the management of a deal with the main general partner.
- How do I structure a JV between a sponsor and capital partner?Start with who does what.
- How do I find a joint venture equity partner?Start by naming your bottleneck, whether that is deal flow, investor access or deal setup.
- What do capital partners expect from an operating partner?I would say capital partners expect three things from an operating partner.
Work through it with the waterfall calculator. See all co-gp and joint venture deals resources.