Syndication and Investor Repayment

13 Replies

Hi Everyone!  My business partner and I are considering the idea of gathering money from investors (friends) to purchase a 12-24 unit apartment complex.  We aren't entirely sure how to go about structuring a contract for the investors that would explicitly lay out how much they'll be paid, if they'll own equity in the complex forever, how expenses work, etc.  Would anyone be willing to offer their insight into how best to approach this idea?  Would greatly appreciate any and all questions, comments and feedback.  Thank you all so much!!

Hey Kyle,

I'm new and have not bought a building but I have been doing a lot of learning for the past 3 months. I plan on investing in multiple syndication deals (for cash flow/return and learning) and also buying 25-75 unit buildings.

The more I learn, the more I realize that there is more to learn...every door opened leads to 10 more doors. Personally, I want to learn everything I can on the operator side first, without taking OPM. My favorite resources (in no particular order) for operating and syndicating funds have been:

-talking to syndicators like @Brian Burke @Ivan Barratt @joe fairless @todd Dexheimer

-listening to MF podcasts like @Gino Barbaro 's Wheelbarrow Profits, Michael Blanks, Joe Fairless

-reading all of the content on the sites of the above mentioned

-networking like crazy and talking to as many people as possible including apartment investors, bankers, brokers, insurance agents, etc.

-analyzing lots of deals

-hustling and starting all over again the next day

Nothing is that difficult, there is just a lot of moving parts and one wrong assumption can blow up your whole investment and lose your investor's money.

Good Luck!

@Kyle Burkhardt Syndication offerings are private securities offerings. Hence, they are governed by SEC. Starting off you will need to hire a securities attorney to get your house in order. This is an important step and you should take the compliance aspect seriously. 

At the 12-24 unit mark, syndication might not be the most cost effective way of structuring the deal. This is because there is not enough meat on the bone i.e. your legal/compliance costs will eat into your profits. This is also why you will see syndicators focusing on deals > 50 units, at a minimum. It doesn't mean that people don't do deals below 50 units, just that it won't be the best bang for your buck. You can look to structure your deal as a JV or partnership.

I am assuming you have a basic understanding of finance (your profile states you work in it). How the deal operates is dependent: 

  • financial structure
  • financial projections

The above will govern revenue/expense/profit splits. 

Underwriting can be easy or difficult depending on the complexity of your deal. Major modeling issues:

  • waterfalls (GP/LP splits), 
  • asset drivers - revenue mix, rent roll, expense ratios -, and 
  • financing details can make

Most, if not all, multifamily models are simple cash flow models based off T3/T6/T12 financials. You layer on your own assumptions (operational, financial, etc) and project 3-5 years. The modeling isn't terribly hard. Any first year analyst at an investment bank or asset management shop should be able to learn it in less than a few hours.

In fact, I teach people - multifamily and used to do it in banking/M&A - and multifamily modeling is not as hard as LBOs and other models used in institutional shops. The value add is in the assumptions which you gain with experience. 

Most commercial real estate is valued using the income approach but investors also use the sales comps and replacement methods (among other methods) to triangulate their answer. I would suggest using industry database, if you can get your hands on industry databases - CoStar, Yardi, REIS, Axios. You can also use publications from major brokerages - M&M, CBRE, JLL - to get local data. Your broker should also be able to provide you this data. 

If you have a background in finance, you should be able to quickly understand the modeling parts. PM me if you need any help. 

@Kyle Burkhardt That arrangement will be part of the operating agreement of the LLC that you form to purchase the property. Before they invest, they'll also need to have reviewed the private placement memorandum (PPM). You'll need an attorney for both cases. If you haven't already, I'd recommend checking out Joe Fairless' podcast, Bill Manassero's podcast, and the articles here on BP about syndication. There's a lot more to syndication than just the property (in fact, you can syndicate just about any kind of business, from real estate to a movie production to sheep), and the investment part of the deal is even more important than the specifics of the property.

@Omar Khan makes a great point as well, 12-24 units may not be the best size for a syndication structure, though that partially depends on your market. What you can get 12-24 units for in California may buy you 100 in Oklahoma City or a smaller market. 

@Kyle Burkhardt You should have a securities attorney to help with all of this. Check out bootstrap legal for a consultation and see if they might work for you.

@Kyle Burkhardt the nice thing is there are no rules as to your payment and payoff structure. You can do a 70/30 split and collect a 2% acquisition fee and 2% management fee like a lot of companies do, you could add a water fall to that as well or you could try a 50/50 with no fees.  You can do a preferred return of 6-10% or no preferred. 

As for payoff, that is also up to you. Most companies are at a 3-7 year hold period and payoff investors at a sale. You could do a payoff, however, after the investors reach a specific return and you refinance as well or just pay them on a debt basis with no equity. 

Contact a few securities attorneys that have done multi-family syndication before and discuss with your partners what works best. The key is to offer attractive returns and take care of your investors. They are trusting you with a lot of money, so you want to be sure that you are taking that very seriously. 

There are lots of ways you can structure a small deal with investors; some cumbersome (full blown securities offering with Private Placement Memorandum, Operating Agreement, Subscription Agreement and Securities Notice filings); some not as cumbersome (Member-managed LLC with all investors responsible for making their own profit). Your legal compliance requirements will largely depend on whether your investors are:

a) active (easiest legal documents) or passive (more complex legal documents); 

b) accredited (easiest legal documents - No PPM required) or non-accredited (PPM/disclosure document required)

c) everything is in one state – you, investors and the property (may be an easy intrastate offering exemption you could follow), or crossing state lines (usually means you have to follow the federal exemption rules, which can be costly)

d) people you have a pre-existing relationship with (easiest way to raise money) or want to advertise (harder to raise money, probably need a track record with similar properties and investors). 

Some of the questions relate to legal compliance, but others are more logistical (who do know that might invest with you)?

A consultation with an experienced syndication attorney can usually place you on the right track and help you figure out what will work for your deal, while containing costs to the extent possible. 

You should also consider getting some formal training in multi-family investing (as others have suggested) as it's easy to make $100,000 mistakes when you are first starting out. Better to learn from others' mistakes versus your own.

@Kyle Burkhardt

You have received a ton of great feedback on the deal's structure and the overall process. I'd suggest educating yourself first on MFH syndications by getting a course from someone who's being doing it for many years and/or finding an experienced syndicator (could the teacher you bought the MFH syndication course from) and offering to do a cap raise for their deal. There's nothing better than shadowing an experienced syndicator. As @KimLisa Taylor mentioned above, it's better to learn from someone else's mistakes than make your own! 

Happy to explore more ideas offline. Feel free to PM me.

Best of luck!

@Kyle Burkhardt . There are plenty of resources on biggerpockets.com to help you get started and have a high level understanding. You can start with some of the podcasts, as you can listen to them while driving or doing something different. That would be the first place to start.

@Kyle Burkhardt - if you just email me, I will send you a fee sample chat and a distribution example. That might help you. 

@Kyle Burkhardt

If you are bringing capital to the game, I would consider creating a partnership for the first one.  You need to speak to a syndication attorney if you decide to raise capital for the deal.  Everything in real estate is negotiable, and in this market, if you can find a great deal, then you have the leverage

Gino

@Gino Barbaro Thank you for the advice.  I listened to both of your episodes yesterday and they were extremely insightful and relative to what my friend, @Sean Edward O'Brien , and I are trying to accomplish through real estate.  I'd love to jump on a call with you sometime next week if you have a second since our goal is to accomplish what you and Jake have accomplished.  Thanks again for the advice on this post!

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