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Multi-Family and Apartment Investing

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Adam M.
  • Investor
  • Texas (DFW & West Texas)
54
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86
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Question on Earnest Money & Limited Partners

Adam M.
  • Investor
  • Texas (DFW & West Texas)
Posted Jan 30 2024, 06:26

Hello! 

Genuinely seeking thoughts from the community here so please keep discussion open and positive :) ! 

Our firm has done many deals in the past with our own capital however we are now looking at taking down multifamily deals with limited partners for the first time, especially as our portfolio is pretty illiquid at the moment.

I myself as executive officer am doing everything I possibly can to make sure I learn about every nuance of the syndication process to make sure things go smoothly before even thinking about submitting any LOIs. As folks know once that timer starts ticking you have got to move! 

We have many soft commits from our LPs excited to work with us seeing as we have typically said no in the past (either we were not ready to take on investor dollars/wanted to build more of a solid foundation first) so we are excited to generate great returns for others that we have been able to do for ourselves for several years. 

That being said as I still have concerns as we explore syndications further: two being being earnest money and timing.

Let's say we're looking at a potential deal that has a purchase price of $13MM, so we would probably need to raise $5.5MM-ish  with a fixed rate agency loan product like a Fannie/Freddie and including renovation cost.

In a typical 1% EMD scenario we would need to come up with $130,000 shortly after executing the PSA. Seeing as sponsors use LPs to help them take on larger deals all the time, how do sponsors typically work with the EMD requirement? Is it included in the raise/LP equity and how does that work seeing as you usually send that in let's say 3 days after executing a PSA? Doesn't the raise happen only after you have executed a PSA?

If there are any other GPs out there that have worked through this problem I would really love to hear from you as I continue to build my knowledge about syndication timelines and execution. 

Many thanks and happy Tuesday! 

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