Foreign investor wants to buy 40-60 Million Dollars office building with my friend

[Neil1]

Hi,

A foreign investor wants my friend to look for a 40-60 Million Dollars office building for him.

He heard about my friend and suggested he be an 'agent'/deal finder, and ideally the local mgmt company will be the partner putting 15% down. (my friend is an asset manager with experience working with property management companies, he is not a real estate agent)



My friend is considering being a partner with ownership rather than 'just' receive a finder fee.



A couple questions please:



1. My friend does not have enough available money to put any down. However he can do all the work from A to Z.

Can he ask for 10% ownership? meaning 10% of the cash flow, value appreciation, principal reduction and future equity take out? Upon sale foreign investor obviously receives his money first. Then they share the profit 90% foreign investor /10% my friend.

Well, of course he can ask but is it common/reasonable/likely to be accepted?

What is a common finder's fee/'deal designing' fee in such a case? 1% of the building value? less? more?



2. The foreign investor is suggesting to put 85% down(!) My friend believes arranging a mortgage if possible would increase the foreign investor's return. Can foreign investors with local partner normally put 50% down or even just 35% down and get the rest from the bank as a loan? Reminder - it is supposed to be a $40-60 Million office building.



Thanks,

Neil

 

[Thomas Beyer]

With investments in that size a hurdle rate, say 6% or 8% per year is common, then perhaps 80% for the investor. So if you can deliver a 90% in 5 years investor will get 5*8% plus 80% of 40% = 72% and you 18%, plus a management fee of perhaps 0.5% of asset value or 1% of cash annually that is counted as a cost. With these investment $s it is teh asset management fee where the income lies, the equity is just bonus at the end.



Getting a mortgage with foreign investors is increasingly difficult due to FATCA disclosure rules, although up to 50% LTV should be doable.



Many foreign investors are very very fickle, and ideally they have some existing deep relationship AND send some money for due diligence costs, travel, inspection costs etc. and then more for initial refundable downpayments. Do not work for free upfront just to be told after months of hard work "Oh sorry, we decided to invest in London (or Dubai or Hongkong) instead".



Each asset class needs deep domain skills and local expertise. Does your friend have that for office buildings in the target city ?

 

[Neil1]

[quote user=ThomasBeyer]With investments in that size a hurdle rate, say 6% or 8% per year is common, then perhaps 80% for the investor. So if you can deliver a 90% in 5 years investor will get 5*8% plus 80% of 40% = 72% and you 18%,






Can you elaborate a bit please:

The foreign investor gets 8% a year + 80% of 40%?

Why 80% of 40%?

I understand 72% for the foreign investor (5yrs x 8%/yr + 32% = 72%), and 18% my friend (90% total in 5 years - 72% = 18%) is indeed 80/20 (72% is 80% of 90) as mentioned in your example.



Also, what if my friend will only enter as a deal finder - one time fee without ownership. Is 1% fee reasonable/common or is it usually less? 1% of $50,000,000.00 = $500,000.00(!)

Would you still recommend getting some fee upfront, even in this case of being a deal finder only without being an owner/partner later? If yes, should at least some of the amount my friend will receive, be non-refundable due to the amount of work needed?

or non refundable by my friend only if he finds a deal, otherwise fully refundable?



How easy (or difficult) is it to implement this legally, meaning for my friend to ensure he gets his share/fee knowing my friend is not a real estate agent?

(He is a RE investor and Asset mgr with properties in Canada)

Since he is not an agent, should he typically work directly with the seller? or with the seller's agent is fine too?



Thanks,

Neil

 

[Thomas Beyer]

Your friend should get an agreement signed with the foreign buyer so that every deal he will show them will require them to pay him a fee on acquisition paid on closing (of say 1% which is reasonable).

 

[Neil1]

[quote user=ThomasBeyer]Your friend should get an agreement signed with the foreign buyer so that every deal he will show them will require them to pay him a fee on acquisition paid on closing (of say 1% which is reasonable).




Thanks,

Neil