100-unit New Build. Syndication Questions. I'm promote + land.

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100-unit New Build. Syndication Questions. I'm promote + land.

Colton T.
Wylie, TX · Member since 2014 · 58 posts · 5 votes

Happy Memorial Day Weekend everyone. I'll jump into it.

I've never syndicated a deal and only have some book knowledge of the process. I've never been on the preferred end or the promote end of any deal, so I'm green in how to structure it appropriately. A solo investor up until now, in other words.

At the moment, I have a deal I'm putting together for the 20% equity required to finance a MF new build project on my land. It's good land. Downtown. Will fit about 100 units. I will put up the land and some cash, plus act as the do-er in the deal from Yr 0 to Yr 5. If I were to do it entirely on my own, it would be a 15% IRR deal from Yr 0 - Yr 5 (new builds aren't cheap). What should I be looking to do to structure a favorable deal for potential investors, in order to maintain control of the project, while putting up only the land (valued at 30% of required equity) and maybe some cash. Are there certain types of splits that favor cash flow over equity build-up for the do-er during the project.

In addition, what are some typical IRR expectations on 5-yr MF deal at this time? I want to be on point with my offering.

Any additional thoughts / advice on this topic would be greatly appreciated.  You may have seen a few other posts from me recently in the MF forum. This is because we're trucking along in the first phases and I want to get all the knowledge I can going in to the next steps.


Thanks for all of your comments!

Colton 

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Franco Tonelli
Attorney · Buenos Aires, CABA · Member since 2018 · 1 post · 1 vote
6y

Hi Colton, this is not the answer you are looking for, but this is the answer you need. 

If you have a 100 unit project you should be seeking professional advice.

Get an accountant to help you with all the tax considerations and get a lawyer to explain all the syndication process and draw up the documents to make sure you comply with all exceptions from SEC registration. If you get a good lawyer he/she will most likely provide sound commercial advise too. 

Good luck!

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  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    6y

    Hey @Colton T., the first questions to answer:

    • How will you finance this project? Many banks have turned off the taps on new construction lending. Even before COVID-19 you were going to be on an uphill climb considering the size of this project and the fact that you have never done this before. If you don't have an experienced partner, I highly doubt you'll be able to get financing.
    • What's your ability to raise capital? If you're able to get financing, my guess is the bank will want closer to 30% equity in cash, the value of your land probably won't count, plus 12-18 months of reserves.
    • What Cap Rate can you build for?
    • What Cap Rate could you sell for?
    1Reply
  • Franco Tonelli
    Attorney · Buenos Aires, CABA · Member since 2018 · 1 post · 1 vote
    6y

    Hi Colton, this is not the answer you are looking for, but this is the answer you need. 

    If you have a 100 unit project you should be seeking professional advice.

    Get an accountant to help you with all the tax considerations and get a lawyer to explain all the syndication process and draw up the documents to make sure you comply with all exceptions from SEC registration. If you get a good lawyer he/she will most likely provide sound commercial advise too. 

    Good luck!

    1Reply
  • Scott Krone
    Investor · Northbrook, IL · Member since 2017 · 352 posts · 295 votes
    6y

    @Colton T.  Congrats on your new opportunity.  A 100 unit development is a significant endeavor from an experience as well as a financial perspective.  The first question to address is, "a 100 what" - condos or rentals, etc.  When dealing with large developments in Downtown typically require significant municipal involvement and approvals.  They may not allow 100 rentals or condos.  They may have different requirements and objectives for those unit types.

    I agree with @Franco Tonelli that you should be seeking professional advice, however, I would not start with an accountant.  I would start with commercial real estate developers or planners to help you get a better sense of whats all involved as well as what is possible. 

    1Reply
  • Colton T.
    OP
    Wylie, TX · Member since 2014 · 58 posts · 5 votes
    6y

    @Jaysen Medhurst

    • Thanks for offering these thoughts and responding to my post.  Some of your questions we do have answered and so for the sake of people following this thread, I'll respond with those below.  This will provide more insight into where I'm at and why I'm inquiring about the questions on my initial post.
    • Financing will be a HUD loan which converts from construction to permanent at a fixed 40 yr.
    • My developing partner has experience in HUD-financed developments and therefore should not be a deterrence in HUDs willingness to work with us. Financing this way will be more leveraged than many loans that would be 25-30% and should sit closer to 20% (15%/85% plus some additional up front costs). My ability to raise capital is strong and partially funded already. Land Value will be considered a portion of the equity, as well. At this point, the plan is to build at a 5.125-5.25% cap and sell in 5-6 years for a 5% cap or better.
    • I'm seeking some general legal / finance input from those who may have some experience in this area. I know I'll need to set up a simple split or preferred structure and want to know some reasons why one might be better than another. For example, if I have 3 equity partners in the deal, with one being the active partner (me), how would a fair structure look for all parties, in current market.

    Thanks

    Colton

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  • Colton T.
    OP
    Wylie, TX · Member since 2014 · 58 posts · 5 votes
    6y

    @Franco Tonelli

    Thanks, Franco. I appreciate the wisdom and agree, professional advice will be necessary.

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  • Colton T.
    OP
    Wylie, TX · Member since 2014 · 58 posts · 5 votes
    6y

    @Scott Krone Thanks a lot for touching base and sharing some ideas to think about. 

    For those following, I'll provide a little more clarity to help show where I'm at and the reasoning for asking about partnership structures in my initial post. 

    To address your first question, I'm talking about 100 3-story walk-up style rental units. Nice, respectable product. Not luxury, not affordable housing, either. Would not be too different from property adjacent to the land, which is TH / MF district.  Market shows good job growth and schooling. New college campus being built nearby, as well.  With plans and relationships coming together, municipal involvement is the next phase, I agree.

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  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    6y

    I'm glad to read all of this, @Colton T.. To dig in deeper to your questions,: before COVID-19, most of the syndications I saw were presenting IRR in the 15% range. With your low cap rates, that might be difficult. If there were a bigger spread between your build and sell caps, I'd see more opportunity.

    A legitimate question that many potential investors may ask is "why?" Why should I invest in this? The low cap rate means low CoC ROI. As a brand new product there's no value-add component. You'll see a little appreciation through natural rent growth, but not a ton.

    Normally, an investment with such a low cap rate would promise more appreciation OR lower risk (or both). Neither is the case here. I'm not trying to discourage you, Colton. I just want to present the viewpoint of someone who who might be writing the check.

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  • Colton T.
    OP
    Wylie, TX · Member since 2014 · 58 posts · 5 votes
    6y

    @Jaysen Medhurst

    Thanks for offering up some good advice.  I'd like to pry for more information, if you don't mind.  

    In your experience, can a new build walk-up product, be built with better cap rates?  I'll admit, a 5.25-ish cap seems expensive to me and you're right, doesn't leave a ton of room for growth, although I think it does leave a little. I'm not from an MF construction background, but based on the numbers I've been piecing together from the developer and engineer, this is what the project costs looks like at this point. 

    The big WHY for us at this point is, it's in a good physical location, strong local job market, good schools, plus new college campus coming nearby. Finally, my own desire to use an available high-leverage scenario for myself and the other investors. The last thing I want to do is spend too much and make too little, though. 

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  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    6y

    I don't have direct experience with something like this, @Colton T., but I do know it's a strategy for developers. The numbers I hear were more like, build at a 6.5-7% Cap and sell at 5% upon completion. FYI: these were examples in DFW, so your neck of the woods. Michael Becker had a discussion about it on the Old Capital Podcast a while back. Sorry I don't know what episode. IIRC, he was talking about A-class assets, so I think that the prices you're being quoted sound high, too.

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