Well – I’ve put the pedal to the metal as it relates to the process of syndication, and I’d like to share with you some of my first impressions.
I apologize in advance to those of you who are used to my articles being on the longer side – this will be rather to the point.
Why – because one thing I am getting confirmation of is that:
Running a Syndicate is a Job!
Yep – this has been the busiest couple of weeks in recent memory. I know what you may say: it’s just because this is your first one – once you close on it and outsource the management, you’ll have nothing more to do than sit there and collect cash flow…
And my answer to you would be – this might be true if I was only doing this one time; but, I am hoping to do 10 syndicated deals in as many years, each one requiring the same amount of output from me. I have to assume that however busy I am at the moment is how busy I will be for the next 10 years…
Honestly guys, it seems that I am always on the phone with someone. And if I am not on the phone, that’s only because I am studying Pro formas. And if I am not doing that, then I am building spreadsheets with which to analyze those proformas…
And Speaking of Pro formas
I’ve come to accept that Pro formas are put together by seller’s agents for one purpose and one purpose only – to fool the idiot buyers who have too much money but not enough brains (feel free to extrapolate upon that). The Proforma incomes are always and without exception overstated.
Often, the incomes are being represented as “Stabilized Income”; as in – the property is not currently stabilized, but you, young Mr. Buyer are a smart a capable guy so you can very easily do what the seller could not and stabilize this property.
Oh yeah – don’t you worry your pretty little head about what the income is right now; just go ahead and pay us a price based on what we tell you the income will be once YOU stabilize this asset…
Nice; thanks so much guys – I think to myself. But, is it terribly silly for me to want to get paid for the work I am about to do to stabilize the building you’ve run down, and don’t my investors need to realize a return on their investment for taking on the risk that comes with the process of stabilizing a large building?
How about this – I pay you a price which is based on current income levels; would that work for you? No one has said yes yet…
And then there are the expenses, which are always understated, and quite often omitted. With this item I am especially disappointed with the CCIM designated crowd…
CCIM is a training program for commercial real estate brokers; it was established in 1954 to essentially teach them how to be the smartest people in the marketplace – the top dogs. It is a national program and it has indeed managed to fool people, most notably its members, into thinking that they are indeed the best and the brightest out there – the best thing to happen to real estate since dirt…
The CCIM people are a bit more knowledgeable than the average agent (though I am finding out not by much), but unfortunately my experience thus far has been:
1. None of the Pro formas delivered to me by CCIM people have included CapEx as part of the expense structure of the asset.
CapEx stands for Capital Expenditures – think of it as a rainy day fund, and it’s not a big freaking secret that roofs get old and need resurfaced, water heater break, windows need replaced, and parking lots need re-paved.
I stand corrected – these things might be news to the Joe-shmo Realtor out there who spends his days showing pretty houses to pretty people, but it sure as all get-up should not be news to a CCIM.
And yet, having gone through 100 proformas in the last 2 weeks, I can count on the fingers of one hand how many of them accounted for CapEx. This means that having accounted for the industry standard of $300/door/year on 100 units, the stated NOI of $190,000 becomes $160,000 in a hurry – see the problem?
So, what does this mean? And the answer – either they don’t know about CapEx, which is very difficult to imagine relative to CCIM designated people, or in their zeal to get the most money for the seller (and the most commission for themselves) they are willing to put out unrealistic Pro formas that no one but a fool would even remotely consider taking action upon…neither is good!
The reality that I have not taken action yet, reflects the fact that I am not a fool and I won’t work with those jokers…
2. Let’s talk about the utilities – one the most difficult and volatile elements in the expense structure of any building. Here’s what one CCIM did (you’ll love this):
I received in e-mail a brochure for a building. It looked interesting; it was in the right location, the rents were in-line, and it indicated expandability via energy efficiency. I wasn’t sure what to make of that, so I requested a Pro forma. Turns out, the owner pays water and heat on this building, and the magnitude of the expense that was listed in the Pro forma was, by my estimates, at least 60% less than I would expect for a building of this size.
So, what did this guy do? He figured he can turn a lemon into lemonade. He called it “Value Add”, which is a buzz phrase signifying significant opportunities to increase value, and suggested that I could have the very distinct pleasure of replacing close to 100 widows by which improving energy efficiency and thus lowering the heating costs – this was his idea of value add.
I read that and nearly fell of the chair – are you kidding me…?
This wasn’t a fire-sale by the way; he wanted a market price for the building. What a way to put pale lipstick on this ugly pig; thanks – I think I’ll pass!
I expected much better from CCIM!
A Good Agent
I think I finally did find a good agent, though. We spoke on the phone for the first time on a Wednesday. About 10 minutes into the conversation, he wanted to schedule a 30-minute block of time to talk more. I offered to simply tell him my criteria – I know it so well, after all. But, he insisted we that we must speak again; he has questions above and beyond my criteria that he must ask and receive answers to, in order to determine if he can help me and how.
We scheduled a time for that Friday, and as I hung up the phone I thought to myself – this is good…
On Friday, 20 minutes ahead of the scheduled time I received a text from him. He apologizing and advised me that his preceding meeting will run a few minutes long. I thought to myself – I am starting to like this guy!
When he called, 7 minutes later than the scheduled time, we spent about 30 minutes on the phone – he asked a lot of questions and LISTENED; once again I thought to myself – right on!
Having heard what he needed to hear he told me that what I want does exist, but that in order to find it he will need go OFF MARKET. I thought to myself–
Score! Finally someone with a damn bit of sense…
Naturally, I will let him keep all of the commission even though I am licensed in the State. Though I am staying in Ohio for this first syndication, the markets that I am looking in are all several hours from where I live, and team members that are quick, honest, and knowledgeable are the key to my success.
I am not about nickel and dime this guy over commission split!
One Other Impression – The Market is Inflated
I am discovering that there are fools out there paying 7 CAP for multi-families and commercial buildings in the Mid-West; if that’s not inflated then I don’t know what is. I am not talking coastal markets here – the Mid-West. Who buys at 7 CAP in Ohio…
Personally, anything under 9.5 – 10 CAP will not work for me and my investors. I am looking for a 12% annualized Cash on Cash (more if I can get it), and 15% IRR, and those numbers just don’t work at anything under 9.5 CAP at the front door.
Until I find what I am looking for I am comfortable sitting on the side-lines for as long as it takes, and I’ve communicated this much to my investors – we are in agreement. A lot of ARMs will be adjusting and balloons coming up in the next couple of years, and I believe that there will be a dip in the market as the result. We can wait until then if we need to…
I am learning new things every day and there are many more items that can go on this list – keep your pants on…First Impressions of a Real Estate Syndicator… by Ben Leybovich