Syndication: Raise 30-35% or 100% of the purchase price?

24 Replies

I have been diligently researching the art of underwriting small multifamily apartment buildings, and I am unclear how much capital is raised in the typical deal. Say, on a $300k building, should I be raising $100k from partners then get bank financing for the rest, OR raise the full $300k then refi in 2-3 years after building stabilizes? The latter would be a bit more of a challenge, and if investors are looking for 10-12% CoC returns, maybe it would be easier and more profitable to raise the $100k, then get a bank loan at 5% for the rest. What do you guys do?

Raise the $100K. Use the power of leverage. After 3 years, refi and pay your investors back their original investment. Then they will trust you and you will have a track record to do it all over again.

Originally posted by @Account Closed :

Raise the $100K. Use the power of leverage. After 3 years, refi and pay your investors back their original investment. Then they will trust you and you will have a track record to do it all over again.

 Thanks! If I am raising only the $100k, do I even need to have any of my own money in the deal?

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Originally posted by @Andrey Y. :
Originally posted by @Sajju Shah:

Raise the $100K. Use the power of leverage. After 3 years, refi and pay your investors back their original investment. Then they will trust you and you will have a track record to do it all over again.

 Thanks! If I am raising only the $100k, do I even need to have any of my own money in the deal?

 That depends on your effectiveness in fund raising.   Personally, I wouldn't invest w/ a first-time lead who has no "skin in the game", and prefer that even seasoned deal sponsors have aligned interests via their equity investment.   Others, however, might.   $100K is small amount to raise, so give it a shot.  

Like @Chris Soignier said, I don't know anyone who would co-invest without either a preferred return or having the your (as operator / lead) equity subordinate.

There's all types, though, so maybe you find someone. I'd say it's not typical.

Short answer, aim for 70% financed by a bank at rates in the 4% range. How much else you raise and at what terms is totally dependent on your network and negotiation skills.

@Andrey Y. , if the property needs rehab make sure the bank would finance that or part of the investors capital will be needed for rehab.

On larger commercial deals, you may need to invest tens of thousands on pre-work prior to a lender providing the funds.

@Andrey Y. , if "you" are putting down the $100k, surely your Lender will ask whether the funds were BORROWED? And, how do you know that your Investors didn't borrow their portion?

ie. the way you described it seems a bit fraught to me, (but I'm only an outside observer)...

Originally posted by @Chris Soignier :
Originally posted by @Andrey Y.:
Originally posted by @Sajju Shah:

Raise the $100K. Use the power of leverage. After 3 years, refi and pay your investors back their original investment. Then they will trust you and you will have a track record to do it all over again.

 Thanks! If I am raising only the $100k, do I even need to have any of my own money in the deal?

 That depends on your effectiveness in fund raising.   Personally, I wouldn't invest w/ a first-time lead who has no "skin in the game", and prefer that even seasoned deal sponsors have aligned interests via their equity investment.   Others, however, might.   $100K is small amount to raise, so give it a shot.  

 Thank you. If I assign myself say 25% of the equity as the sponsor and manager of the asset, and the investors 75%, would you say our interests are still aligned? Even if I have little to none of my own capital in the deal.

Originally posted by @Justin R. :

Like Chris Soignier said, I don't know anyone who would co-invest without either a preferred return or having the your (as operator / lead) equity subordinate.

There's all types, though, so maybe you find someone. I'd say it's not typical.

Short answer, aim for 70% financed by a bank at rates in the 4% range. How much else you raise and at what terms is totally dependent on your network and negotiation skills.

 Got it. I can give the investors a preferred return say at 10-12%, then split further profits between the manager (myself) and the investors 50/50. If I do this however, should I be increasing my equity share in the property? Thank you for the great suggestions and keep them coming!

Originally posted by @Brent Coombs :

@Andrey Y., if "you" are putting down the $100k, surely your Lender will ask whether the funds were BORROWED? And, how do you know that your Investors didn't borrow their portion?

ie. the way you described it seems a bit fraught to me, (but I'm only an outside observer)...

 What I am describing is typical and how a syndication works. All parties KNOW that the sponsor is raising money from INVESTORS.. will the bank demand proof from each and every investor that their funds aren't borrowed? Doubtful, since syndicators raise capital from 10-20+ partners on larger deals all the time, and banks fund the transaction if the deal and risk makes sense on their end.

Originally posted by @Andrey Y. :
Originally posted by @Chris Soignier:
Originally posted by @Andrey Y.:
Originally posted by @Sajju Shah:

Raise the $100K. Use the power of leverage. After 3 years, refi and pay your investors back their original investment. Then they will trust you and you will have a track record to do it all over again.

 Thanks! If I am raising only the $100k, do I even need to have any of my own money in the deal?

 That depends on your effectiveness in fund raising.   Personally, I wouldn't invest w/ a first-time lead who has no "skin in the game", and prefer that even seasoned deal sponsors have aligned interests via their equity investment.   Others, however, might.   $100K is small amount to raise, so give it a shot.  

 Thank you. If I assign myself say 25% of the equity as the sponsor and manager of the asset, and the investors 75%, would you say our interests are still aligned? Even if I have little to none of my own capital in the deal.

Yes in that you both profit from the upside, no b/c IMO you're screwing them by taking 25% of their equity.   Their first 33% return will be just to cover their "gift" to you.   Why not take a modest override (5-10%), plus asset and property management fees totaling 5% (which you may have to pay back out, depending on if you DIY or not)?    Think of this as an internship, and people are taking a leap of faith on you w/ no track record.    You're learning on their dime, so you shouldn't be too demanding in terms of lead compensation.     Earn your comp when you create value, not when you close the deal, and your investors will appreciate and trust you more, which can only help to build your reputation and make capital raising that much easier in future deals.

Originally posted by @Chris Soignier :
Originally posted by @Andrey Y.:
Originally posted by @Chris Soignier:
Originally posted by @Andrey Y.:
Originally posted by @Sajju Shah:

Raise the $100K. Use the power of leverage. After 3 years, refi and pay your investors back their original investment. Then they will trust you and you will have a track record to do it all over again.

 Thanks! If I am raising only the $100k, do I even need to have any of my own money in the deal?

 That depends on your effectiveness in fund raising.   Personally, I wouldn't invest w/ a first-time lead who has no "skin in the game", and prefer that even seasoned deal sponsors have aligned interests via their equity investment.   Others, however, might.   $100K is small amount to raise, so give it a shot.  

 Thank you. If I assign myself say 25% of the equity as the sponsor and manager of the asset, and the investors 75%, would you say our interests are still aligned? Even if I have little to none of my own capital in the deal.

Yes in that you both profit from the upside, no b/c IMO you're screwing them by taking 25% of their equity.   Their first 33% return will be just to cover their "gift" to you.   Why not take a modest override (5-10%), plus asset and property management fees totaling 5% (which you may have to pay back out, depending on if you DIY or not)?    Think of this as an internship, and people are taking a leap of faith on you w/ no track record.    You're learning on their dime, so you shouldn't be too demanding in terms of lead compensation.     Earn your comp when you create value, not when you close the deal, and your investors will appreciate and trust you more, which can only help to build your reputation and make capital raising that much easier in future deals.

That's interesting. The only reason I say that is because Michael Blank recommends the 25% or 30% equity for the sponsor if the deal supports it. How are you "screwing" the investors if they are achieving their wanted and preferred rate of return?

I totally agree with creating value and earning your investors trust by putting together a kick *** deal. This is exactly what I will do. Can you clarify what you mean by "Earn your comp when you create value, not when you close the deal.."? Mr. Blank also recommends a 1-3% acquisition fee and 1-3% disposition fee for the sponsor. Wouldn't the acquisition fee be during when one "closes the deal".

My number one reason for tackling apartments is for the education/process and to make my investors money. I am finding that SFHs are in a way "thinking small", and although you do build some relationships, they are not what I would call higher order ones.

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Originally posted by @Hubert Washington :

@Andrey Y.

You may want to check out Principles of Real Estate Syndication by Samuel K Freshman and It's a Whole New Business by Gene Trowbridge. These are two great books on syndication.

Best of luck on your journey!

 Thanks Hubert! Those sound like my reading for next week.

Originally posted by @Andrey Y. :
Originally posted by @Chris Soignier:
Originally posted by @Andrey Y.:
Originally posted by @Chris Soignier:
Originally posted by @Andrey Y.:
Originally posted by @Sajju Shah:

Raise the $100K. Use the power of leverage. After 3 years, refi and pay your investors back their original investment. Then they will trust you and you will have a track record to do it all over again.

 Thanks! If I am raising only the $100k, do I even need to have any of my own money in the deal?

 That depends on your effectiveness in fund raising.   Personally, I wouldn't invest w/ a first-time lead who has no "skin in the game", and prefer that even seasoned deal sponsors have aligned interests via their equity investment.   Others, however, might.   $100K is small amount to raise, so give it a shot.  

 Thank you. If I assign myself say 25% of the equity as the sponsor and manager of the asset, and the investors 75%, would you say our interests are still aligned? Even if I have little to none of my own capital in the deal.

Yes in that you both profit from the upside, no b/c IMO you're screwing them by taking 25% of their equity.   Their first 33% return will be just to cover their "gift" to you.   Why not take a modest override (5-10%), plus asset and property management fees totaling 5% (which you may have to pay back out, depending on if you DIY or not)?    Think of this as an internship, and people are taking a leap of faith on you w/ no track record.    You're learning on their dime, so you shouldn't be too demanding in terms of lead compensation.     Earn your comp when you create value, not when you close the deal, and your investors will appreciate and trust you more, which can only help to build your reputation and make capital raising that much easier in future deals.

That's interesting. The only reason I say that is because Michael Blank recommends the 25% or 30% equity for the sponsor if the deal supports it. How are you "screwing" the investors if they are achieving their wanted and preferred rate of return?

I totally agree with creating value and earning your investors trust by putting together a kick *** deal. This is exactly what I will do. Can you clarify what you mean by "Earn your comp when you create value, not when you close the deal.."? Mr. Blank also recommends a 1-3% acquisition fee and 1-3% disposition fee for the sponsor. Wouldn't the acquisition fee be during when one "closes the deal".

My number one reason for tackling apartments is for the education/process and to make my investors money. I am finding that SFHs are in a way "thinking small", and although you do build some relationships, they are not what I would call higher order ones.

 W/ all due respect to Mr. Blank, I've invested in 11 MF syndications.    Not once have I granted equity to a sponsor or paid an acquisition or disposition fee.    Lifestyles Unlimited is controversial here at BP, but one thing they clearly don't get enough credit for is issuing deal sponsor guidelines that are fair to all parties.

You have no track record, and are justifying taking equity based on pro formas that may or may not be realized.   Let's say you fail to realize them.   Not only am I stuck in an underperforming deal, but I've also given away 25 cents on the dollar for the privilege of doing so.

Many investors don't think acquisition and disposition fees are nearly as material as they are, b/c they don't account for the fact a only equity pays for a fee on the entire asset value. For instance, if you leverage at 80% LTV, a 2% acquisition fee amounts to 10% of my starting investment paying for it. Then you want to take 25% of the remaining equity, and I'm left w/ barely over 2/3 of my investment (67.5%, to be precise) left working for me before you've created any significant value. Now my first 48% in returns is just going to get me back to break-even! I am looking for a 150+ unit complex as a sponsor, along w/ my sister-in-law and another partner, and we will not be resorting to those types of fees, either.

Sure, there are unsophisticated investors who will bite at such comp structures, but I can do deals all day long w/o those fees, and have seen a direct correlation between lead greediness and their difficulty in fully subscribing their private placements.

Originally posted by @Chris Soignier :
Originally posted by @Andrey Y.:
Originally posted by @Chris Soignier:
Originally posted by @Andrey Y.:
Originally posted by @Chris Soignier:
Originally posted by @Andrey Y.:
Originally posted by @Sajju Shah:

Raise the $100K. Use the power of leverage. After 3 years, refi and pay your investors back their original investment. Then they will trust you and you will have a track record to do it all over again.

 Thanks! If I am raising only the $100k, do I even need to have any of my own money in the deal?

 That depends on your effectiveness in fund raising.   Personally, I wouldn't invest w/ a first-time lead who has no "skin in the game", and prefer that even seasoned deal sponsors have aligned interests via their equity investment.   Others, however, might.   $100K is small amount to raise, so give it a shot.  

 Thank you. If I assign myself say 25% of the equity as the sponsor and manager of the asset, and the investors 75%, would you say our interests are still aligned? Even if I have little to none of my own capital in the deal.

Yes in that you both profit from the upside, no b/c IMO you're screwing them by taking 25% of their equity.   Their first 33% return will be just to cover their "gift" to you.   Why not take a modest override (5-10%), plus asset and property management fees totaling 5% (which you may have to pay back out, depending on if you DIY or not)?    Think of this as an internship, and people are taking a leap of faith on you w/ no track record.    You're learning on their dime, so you shouldn't be too demanding in terms of lead compensation.     Earn your comp when you create value, not when you close the deal, and your investors will appreciate and trust you more, which can only help to build your reputation and make capital raising that much easier in future deals.

That's interesting. The only reason I say that is because Michael Blank recommends the 25% or 30% equity for the sponsor if the deal supports it. How are you "screwing" the investors if they are achieving their wanted and preferred rate of return?

I totally agree with creating value and earning your investors trust by putting together a kick *** deal. This is exactly what I will do. Can you clarify what you mean by "Earn your comp when you create value, not when you close the deal.."? Mr. Blank also recommends a 1-3% acquisition fee and 1-3% disposition fee for the sponsor. Wouldn't the acquisition fee be during when one "closes the deal".

My number one reason for tackling apartments is for the education/process and to make my investors money. I am finding that SFHs are in a way "thinking small", and although you do build some relationships, they are not what I would call higher order ones.

 W/ all due respect to Mr. Blank, I've invested in 11 MF syndications.    Not once have I granted equity to a sponsor or paid an acquisition or disposition fee.    Lifestyles Unlimited is controversial here at BP, but one thing they clearly don't get enough credit for is issuing deal sponsor guidelines that are fair to all parties.

You have no track record, and are justifying taking equity based on pro formas that may or may not be realized.   Let's say you fail to realize them.   Not only am I stuck in an underperforming deal, but I've also given away 25 cents on the dollar for the privilege of doing so.

Many investors don't think acquisition and disposition fees are nearly as material as they are, b/c they don't account for the fact a only equity pays for a fee on the entire asset value. For instance, if you leverage at 80% LTV, a 2% acquisition fee amounts to 10% of my starting investment paying for it. Then you want to take 25% of the remaining equity, and I'm left w/ barely over 2/3 of my investment (67.5%, to be precise) left working for me before you've created any significant value. Now my first 48% in returns is just going to get me back to break-even! I am looking for a 150+ unit complex as a sponsor, along w/ my sister-in-law and another partner, and we will not be resorting to those types of fees, either.

Sure, there are unsophisticated investors who will bite at such comp structures, but I can do deals all day long w/o those fees, and have seen a direct correlation between lead greediness and their difficulty in fully subscribing their private placements.

 Interesting! Looks like two totally different ways to skin the cat. So, what value do you think a sponsor creates who: analyses 100s of deals, offers on 50+ before getting one that makes sense, meets with brokers/PMs/lenders etc., walks properties, finds and manages contractors, manages PM, runs financials and statements, disbursements, etc. 5% equity and nothing else? 10%? I wonder if Ben Leybovich or Brian Burke would not take an acquisition or disposition fee?

You like to use this term "gift" often :) If an investor is making 10-12% CoC return with potential upside on exit, would they care what they are gifting you? Maybe they would be happy! This is directly mentioned in Michael Blank material but I guess the deal has to make sense for it. If you don't mind sharing, how are you tentatively looking to structure that 150+ unit for the sponsor?

It would be simple.   We'd sell Class A units, which would provide a 15-20% override to sponsors, to passives.    If it was just my sis-in-law and me, it would prob. be less, but our other partner has an extensive track record of successful MF acquisition and management.   The override would be on all distributions and excess returns upon sale once all initial capital had been returned to investors.   All investors would pay 5% for asset and property management, of which we'd likely pass 3% through to 3rd party property managers.    No acquisition or disposition fees, taking 15-20% of the revenues and gain on sale s/b a fair reward.

I've seen crappy leads, and known of leads to get voted out of their managing membership.   Under my scenario, they can keep their equity but lose their override.   Under yours, they still have passives' 25% equity share and the upfront acquisition fee despite destroying shareholder value.

More power to leads who reap those fees, but if you're a passive in Lifestyles Unlimited &/or network w/ Brad Sumrok's students, those types of deals will look pretty unappealing.

Originally posted by @Andrey Y. :
Originally posted by @Justin R.:

Like Chris Soignier said, I don't know anyone who would co-invest without either a preferred return or having the your (as operator / lead) equity subordinate.

There's all types, though, so maybe you find someone. I'd say it's not typical.

Short answer, aim for 70% financed by a bank at rates in the 4% range. How much else you raise and at what terms is totally dependent on your network and negotiation skills.

 Got it. I can give the investors a preferred return say at 10-12%, then split further profits between the manager (myself) and the investors 50/50. If I do this however, should I be increasing my equity share in the property? Thank you for the great suggestions and keep them coming!

Yes, that's generally what I would expect.  The actual numbers are negotiable - some people want higher prefs and lower equity ... some the opposite.  Depends on the risk of the deal, the holding time, and the operator's track record.

Consider that investors regularly have access to projects from very experienced leads where the leads are all investing their own capital, and that common terms may be 7% pref, 75/25 profit split, and say 1% acquisition, 4% management, and 1% disposition.

I probably wouldn't take a chance on a new operator.  I certainly wouldn't do it unless the terms or project were much better than what I said above.  As @Chris Sognier said, the other fees should be mostly covering actual costs (meaning, not meaty profit centers).  But, the people you're hearing from on this thread probably have higher expectations that some others.

FWIW, I've also seen syndications where the first X% of the raise has better terms than the second Y% of the raise.  So, you may consider that approach if you're not sure how investors will react to your pitch.

Originally posted by @Justin R. :
Originally posted by @Andrey Y.:
Originally posted by @Justin R.:

Like Chris Soignier said, I don't know anyone who would co-invest without either a preferred return or having the your (as operator / lead) equity subordinate.

There's all types, though, so maybe you find someone. I'd say it's not typical.

Short answer, aim for 70% financed by a bank at rates in the 4% range. How much else you raise and at what terms is totally dependent on your network and negotiation skills.

 Got it. I can give the investors a preferred return say at 10-12%, then split further profits between the manager (myself) and the investors 50/50. If I do this however, should I be increasing my equity share in the property? Thank you for the great suggestions and keep them coming!

Yes, that's generally what I would expect.  The actual numbers are negotiable - some people want higher prefs and lower equity ... some the opposite.  Depends on the risk of the deal, the holding time, and the operator's track record.

Consider that investors regularly have access to projects from very experienced leads where the leads are all investing their own capital, and that common terms may be 7% pref, 75/25 profit split, and say 1% acquisition, 4% management, and 1% disposition.

I probably wouldn't take a chance on a new operator.  I certainly wouldn't do it unless the terms or project were much better than what I said above.  As @Chris Sognier said, the other fees should be mostly covering actual costs (meaning, not meaty profit centers).  But, the people you're hearing from on this thread probably have higher expectations that some others.

FWIW, I've also seen syndications where the first X% of the raise has better terms than the second Y% of the raise.  So, you may consider that approach if you're not sure how investors will react to your pitch.

 Awesome. That is in line with my expectations. When you say 75/25 profit split, are you referring to waterfall cash flow above the 7%, or equity in the deal upon exit, both?

Originally posted by @Andrey Y. :
Originally posted by @Brent Coombs:

@Andrey Y., if "you" are putting down the $100k, surely your Lender will ask whether the funds were BORROWED? And, how do you know that your Investors didn't borrow their portion?

ie. the way you described it seems a bit fraught to me, (but I'm only an outside observer)...

 What I am describing is typical and how a syndication works. All parties KNOW that the sponsor is raising money from INVESTORS.. will the bank demand proof from each and every investor that their funds aren't borrowed? Doubtful, since syndicators raise capital from 10-20+ partners on larger deals all the time, and banks fund the transaction if the deal and risk makes sense on their end.

Given your stated knowledge of banks' funding policies, why even raise the question as a topic?

Nonetheless, thanks for doing so. I hope you are taking the (non-granted) equity issue seriously...

Hi Andrey,

On a $300K building, not sure why you are looking at syndication.  Seems like you could just get a few partners together, get a partnership agreement, decide on R&Rs, funding, etc (see an attorney) and take this down.  You want to include renovations costs, closing costs, etc in the financing of the deal.  The thread above did explore some interesting angles on partnership percentages, structure, etc that are instructive and highly personal.  Every deal is different.  We see typically 1-3 % for acquisition fees (keep in mind money is spent by sponsor in due diligence that can be lost if determined not to purchase so some risk there for GP), 1-3% for asset mgt fee to manage the property manager and ensure the business plan gets implemented, disposition fee of 1% optional. We see GP / LP splits of 25/75 or 30/70 common w/experience syndicators.

I've add a couple posts that may help you w/either capital raising or learning from experts first to gain a reputation before you start syndicating.  My experience was made better by teaming w/experts.  Raising capital w/o a good market, deal or team would have been very difficult.

https://www.biggerpockets.com/forums/432/topics/30...

https://www.biggerpockets.com/forums/432/topics/30...

Dave

Andrey

I agree with David, that a "syndication" for $300K is probably not the best way to do this. Your "syndication" cost are too high for the size deal. A simple llc partnership will do and the returns discussed above pretty much frame the range of investment options available. The one thing that I will take exception to is that because you have "no" money in the deal, you do not have "skin" in the game. On a deal this size, you will be signing full personal recourse on the loan. Your investors typically do not in a true syndication. Your liability is far greater than the investors.

Also, I think that if you are going to raise capital for this type deal, your investors will most likely need to sign the loan docs. For me that is the the same as cash. Since each investor may have different borrowing ability, the loan clause "joint and severally" means that the strongest investor will always bear the biggest burden. If I can not get the loan on my own, then I would do this 100%cash and let each investor finance their own investment. (ie. borrow against IRA etc...)

A refi after a proven seasoning is always easier and if you can "cash out" your initial investment, your long term returns will more than offset the initial low COC returns.