How to Split GP Equity Between Co-Sponsors

Split GP equity by the work and the risk each co-sponsor carries over the life of the deal: finding and closing it, signing the loan as key principal or guarantor, putting earnest money at risk, and running the property for years. Tie each slice to a written duty, add vesting so a partner who stops working stops earning, and be careful with any slice tied to how much money a partner raises, because pay based on the size of a securities sale can raise broker-dealer questions.

Co-sponsoring is a common way for a first-time sponsor to get a deal done with partners who bring experience or a balance sheet. It also creates the most common fight in syndication: who gets what. This guide gives a simple way to divide the general partner (GP) share, a made-up example, and the terms that keep a partnership working. It is not legal or tax advice.

What does GP equity actually include?

In a typical syndication, the deal LLC has two groups of owners: investors (limited partners or members) and the sponsor team (the GP or managing member). The GP's economics come from three places:

1. The promote, the GP's share of profits after investors get their return. See the syndication waterfall.
2. GP fees, such as acquisition and asset management fees. See how sponsors get paid.
3. The GP's co-investment, if the team puts in its own money. That part usually earns like any investor's money.

Co-sponsors often split each of these differently. A partner who runs the property every month may earn most of the asset management fee, while the promote is shared by everyone who took on risk.

Which roles should the split reward?

List the jobs first, then assign people to them. Common roles:

Fannie Mae's Multifamily Guide defines key principals as people who control or manage the borrower or the property, are critical to its success, or may be required to provide a guaranty (Fannie Mae Guide, Part I, Chapter 3). Lenders take that role seriously, so the split should too. See loan guarantors in a syndication and co-sponsors and key principals.

Why is "pay for raising capital" a problem?

Many teams want to give points to whoever brings in investors. That is where care is needed.

The SEC's guide to broker-dealer registration lists questions that point toward broker activity, including whether a person takes part in solicitation or negotiation and whether their pay depends on the outcome or size of the deal. Section 15(a) of the Exchange Act (15 U.S.C. 78o) generally requires brokers to register. Rule 3a4-1 gives a safe harbor for certain people associated with an issuer, but one condition is that they are not paid commissions or other pay based on securities transactions.

So a GP slice that grows with the dollars a partner raises can look like transaction-based pay. How far this reaches for a co-sponsor who also does real GP work is not fully settled, and the answer depends on facts. Talk to a securities attorney before you tie any equity to capital raised. Also remember that managing members and anyone paid to solicit investors are covered persons under the bad actor rule, so every co-sponsor needs that check. For more, read paying capital raisers.

A made-up example: a points system

Two co-sponsors divide 100 GP points by role. Capital raising is not a line. All numbers are made up.

Partner A finds the deal and runs it, so A holds 55 points. Partner B signs the loan, funds the deposit and handles investors, so B holds 45. If the promote turns out to be $400,000 over the hold, A would receive $220,000 and B $180,000. The example says nothing about whether a promote will be earned; it only shows how a split works.

The point of writing it this way is that the role, not the person, owns the points. If Partner A stops asset managing in year three, the 30 asset management points can move to whoever takes over, under the vesting terms.

How should vesting and buy-sell terms work?

Percentages cause fewer fights than what happens when life changes. Put these in the GP's own operating agreement:

• Vesting for ongoing roles. Points for asset management and reporting can vest over the expected hold, for example in equal yearly parts. Points for one-time work, such as acquisition, are often earned at closing.
• Removal for cause. Define cause (fraud, a breach, a failure to perform), what the removed partner keeps and who decides.
• Guaranty swaps. If a guarantor leaves, the lender must approve a replacement. Decide who finds one and who pays for the change.
• Buy-sell. A way for one partner to buy out the other at a set or appraised price, plus rules for death, disability and divorce.
• Decision rights. Which decisions need both partners (a refinance, a sale, a capital call) and how a deadlock is broken.
• Indemnity among guarantors. If one guarantor pays under the loan guaranty because of another partner's act, who reimburses whom.

Vesting a profits interest has tax effects, including whether an election under Section 83(b) makes sense. Ask your CPA before you sign.

What do investors see?

Investors care about who controls the deal and who is responsible for each part. Your offering documents should name the GP team, describe each person's role and disclose the fees and promote. They do not usually show how the GP splits its share internally, but they should not contradict it. A clear split also helps in conversations with investors: you can explain who to call about what.

How DoorRaise fits in

DoorRaise helps sponsors raise equity for apartment buildings with 5+ units from their friends and followers under Rule 506(b) or 506(c). It forms the deal LLC, prepares the standard offering documents, files Form D and state notices, and verifies accredited investors for 506(c). DoorRaise does not decide how co-sponsors split the GP, and its fees do not depend on that split: $1,500 to set up (non-refundable), $5,000 at closing (only if the deal closes) and $3,500 a year, with no percentage of the raise and no part of the promote. Investors fund by wire into escrow at Enterprise Bank & Trust, an FDIC-insured bank.

Ready to raise? Create your free sponsor page or see pricing.

FAQ

Is a 50/50 split a good idea?

It is simple, but it hides who does what and leaves no tie breaker. If the work is not equal, a split by role is easier to defend later.

Can I give a co-sponsor points for bringing investors?

Pay tied to the amount raised can raise broker-dealer questions. Reward real GP duties instead, and ask a securities attorney before doing anything else.

Should the guarantor get more?

The guarantor takes personal risk that lasts the life of the loan, so many teams give that role a meaningful share. How much is a negotiation, not a rule.

What happens if a partner wants out before the sale?

That is what vesting and buy-sell terms are for. Without them, a partner who leaves may keep their full share.

Do investors need to approve our GP split?

Usually not, but the offering documents must describe the team and the economics accurately.

Next step: read co-sponsors and key principals on a first syndication to decide who should sign the loan.

Sources

• SEC: Guide to Broker-Dealer Registration
• 15 U.S.C. 78o (Exchange Act Section 15)
• 17 CFR 240.3a4-1
• Fannie Mae Multifamily Guide, Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals
• 26 U.S.C. 83

This article is general information, not legal, tax or investment advice. Talk to a securities attorney about your deal. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.