Clarksville, TN · Member since 2016 · 19 posts · 3 votes
I am currently located in a hot market right now (Nashville, TN), and there is a lot of new construction and development of large multifamily. Our business strategy is to find stable properties with value add components, which are getting harder and harder to find without paying a premium. My question is, how are sponsors structuring their syndications to provide their investors a good return on their investment and get their money back in 1-3 years on new large multifamily construction? Are they relying solely on appreciation, hoping that the appraisal will come back higher because it's in an up and coming market? Are they using it as a tax benefit for the investors during the years that they are still trying to stabilize the property? I know that sponsors/investors are making money and there is a market for them........What am I missing?
Also, the end value obviously needs to be higher than the construction costs. Developer makes their money from "construction management" fees of around 1-3% of construction costs, developer fees of like 2%-5% of construction costs. Other stuff built into the construction budget that is funded by lender and equity side. There's also an interest reserve component, which is pretty much the lender funding their own interest payments during construction.
The ones I have seen are structured with a preferred annual return of something like 8%, and then 50%-75% of the proceeds from the sale on the back end go to the equity partner. Development deals are always valued on today's numbers. So rents, cap rates, etc., all based on today. Any appreciation is a bonus.
Also, the end value obviously needs to be higher than the construction costs. Developer makes their money from "construction management" fees of around 1-3% of construction costs, developer fees of like 2%-5% of construction costs. Other stuff built into the construction budget that is funded by lender and equity side. There's also an interest reserve component, which is pretty much the lender funding their own interest payments during construction.
Daniel, I think that this question all comes down to your strategy in business/agreement with your investors. If you're structuring your deal on a promote waterfall with IRR hurdles mostly these are done on a 5-10yr time frame (fund). Your investors would be paid out in the agreed preferred return while also meeting certain IRR hurdles. The way it can be structured are solely up to you but I would consider making the deal at a preferred return up to x percent then any additional return becomes your profit.
For example:
6% preferred return up to 14% and anything over 14.01% becomes additional revenue for you the developer. This structure incentives you to want to increase your investors returns while also allowing you an additional revenue.
Let me know if I can help in anyway!
@Zach Mitchell thanks for the information. Sounds like the developer's deal structure is similar to a multifamily syndication deal that a multifamily sponsor puts together. One thing that we've seen is that, from a sponsor's point of view, the new construction properties that are being built by developers and sold at 3-5% CAP Rate doesn't leave enough on the bone to be able to cash flow and provide the investors with a good return. BUT, even these properties are not staying on the market very long! Which made me question if I was missing something....
@Account Closed it seems like our strategy is pretty much in line with what you are saying. One thing that we are seeing, especially in such a hot market, is that investors are wanting a shorter term investment (1-3yrs). With our strategy of refinance in year 3-5 with exit strategy around year 7-10, it makes it harder to find investors that want a longer term before they get their capital back.
We offer a good rate of return for our investors, striving for 14-16% average annual return until capital is returned, and with a cash on cash return of 10%. Refi split and sale profit is split anywhere between 60/40 to 80/20 depending on the property. We are open to providing a preferred rate 5-8% with a lower split percentage, and based on the initial property projections.
One thing that we are looking to incorporate is to be able to give a portion of our percentage of the profit to a charity. The charity of choice would be voted upon by the investors. This would completely come out of the our percentage (sponsor's), not the investors; however, the investors would get the benefit of voting on which charity we would donate to, and receive their percentage of the added tax benefit for the donation. We are very thankful and appreciative for everything we have in life and feel that we should give back to people who are less fortunate.