Delayed Syndication for MFR takedown?

8 Replies

Is it possible to structure a personal purchase of a commercial MFR property with the intention of selling of pieces of the deal after the deal has closed?

Why I ask: I buy properties for my personal portfolio (I'm not a syndicator, yet.) Sometimes I get shown deals that are just a little outside of my strike-zone. If I check the seat-cushions and the change jar, I'd have just enough to close the deal, do the capex, and have 3-6 months of operating reserves. But then I'd have a big chunk of my net-worth tied up in a single deal, which I don't want for the long-term.

So, my thinking is, I would spend my initial time and resources finding, funding and closing good deals with my own money and financing, then I'd eventually sell half of the ownership to friends, family and colleagues after I closed the deal. Maybe I could even structure the sale to account for risk tolerance. So my early-adopter, start-upy friends could get in early right after I close, and maybe my retired mother comes in after stabilization.

Does it work, and if i have that exit strategy in mind, should I do anything before-hand? Obviously, I'd have to have an LLC take on the initial financing. Anything else?

Thanks for your thoughts!


@James Kojo The short answer is yes.  The longer answer is that you will have to address  issues of valuation and due-on-sale clauses in your loan.  

Let's say you acquire using cash. After Capex and stabilization, you now have a property worth more than what you put into it. So you can sell ownership units "at cost" which is what unsophisticated investors will likely expect, or you can sell them at an estimated (or appraised) fair market value, which both sides will likely want to haggle over. But it can be done.

Let'a say you utilize debt to acquire the property.  You'll face the same issue above, but with the additional pleasure of having to navigate potential due-on-sale clauses in the loan.  Which means if there is a transfer of ownership, the lender can call the loan due at that time.  So you will have to be aware of any clauses in your loan documents.

Don't forget to talk to a securities attorney, too. It sounds like you'd be selling investment vehicles, and you wouldn't want to run afoul of SEC regulations. Interesting idea!

@James Kojo I’ve done this...back in my earlier days as a syndicator I didn’t have the investor base to fund the whole acquisition, we were still growing the relationships. So we closed on the deal using our own funds and then syndicated the deal. We subscribed the investors at historical basis which basically meant that we got no return on our money (we’ll, we got the pro-rata share of income while we still had capital in the deal but that wasn’t something you could retire off of).  It took 18 months to fully fund the offering of almost $2.5MM.  I look back and laugh at ourselves now...we’ve raised that in 24 hours now (amazing how things change over time).

This was also a common practice back in the heyday of TICs. Groups would take down a property and then sell it to the TIC investors. The problem is that as a TIC sponsor earning a profit share is tricky so what they did was mark the property up when they made the sale to the investors. It was a recipe for disaster because this created the polar opposite of alignment of interest with their investors. When the market turned, the whole thing unwound and resulted in catastrophic investor losses. I know of one sponsor and a few of his guys that are doing serious hard time as a result. Marking the property up wasn't the illegal act, stealing the money was.

So this means do it right, don’t be greedy, get good legal counsel and live happily ever after. Or ignore that advice and enjoy many years of all-inclusive government sponsored housing and one exercise break per day.

@James Kojo this can be done (with attorneys of course). You likely won't trigger a due on sale clause if you are bringing in multiple investors yet maintaining full control and your investor partners maintain less than 20% ownership. On a 70/30 split that means you largest investor can only bring 28% of the money. 

@Brian Burke Maybe someday I'll get to a point where I can say: "Hey, remember that time I had to put my own money into the deal to get it closed? That was crazy, right!?" :) Sounds like you are already there. 

With regards to your TIC story, yeah, I definitely don't want to do anything that would misalign my own interests with my investors. Legal risks aside, that would be against my personal code of conduct, and I really don't need the money that bad. I think I'll steer click of that particular pitfall by forgoing the time-value of the money that I put in, and just give shares to my investors at-cost, like you did.

Thanks for the story and the advise!


@Yousif Abudra @Brian Burke @Todd Dexheimer : Will I have to setup the the syndication (PPM, Form-D, etc) before I close, or can I wait until I'm ready to take investors? Are there any special provisions i need to have in the LLC operating agreement before-hand, or can I just amend it when I get there?



You might be able to do the offering documents after the fact. The gatekeeper is your lender. If you think you might be doing an offering later you should have your counsel carefully review your loan covenants to be sure that won’t be violating them. It’s likely that any issues can be addressed at the time the loan is originated by either negotiating the loan covenants to allow what you intend to do in the future, or by writing the operating agreement so that it is in final form and all you need to do later is the PPM and subscription agreement, with no modifications necessary to the operating agreement. 

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