Hey BP Community,
I'm trying to figure out how much cash I'll need to raise in order to obtain a commercial loan and be able to close on a light value add property. He is roughly what I've come up with but would like input from the community.
$1M Property (12-24 units) - will need to meet or partner with someone who meets Net Worth requirement
15% Reserves - 6 months of debt service + light rehab
I'm targeting the raise at $400K. Does that sound too much, too little or about right?
10% liquidity after close $75K
How much to allocate for the following:
Closing Costs (2%?)
Due Diligence / Inspections
Legal - to create LLP and PPM
What else am I missing?
I can probably achieve or partner with someone who will help with the Net Worth, Credit Score, Cash Reserves and am planning to buy something that will have a Debt Service Coverage Ratio above 1.25%, but I've never bought a commercial property before. If I meet the other financial requirements will lack of multifamily experience be a deal killer? Or do I need to knock on the door of smaller local banks?
I'm probably missing a few obvious things so please let me know if this fosters additional questions or discussion.
@Herman Herrera thanks for the detailed response! It doesn’t sound like the inspection was a big part of your costs...I am anticipating that as a bigger portion in MF than in your commercial example. Then again, maybe not.
@Mark Doty When we look to determine the capital stack, we first determine all our "Uses" or costs. So, what is not clear is in the "light value add",
what amount is necessary for that?
is it a performing asset?
how long will it take to get it performing?
We take all those figures to determine the Uses in our Proforma, and then apply the market rate on debt for the Sources. The balance is the necessary Equity. The sources must equal the uses.
@Mark Doty I don't think the costs to create LLP and PPM make sense with that small of a property. You'd be better off partnering with one or two other people in a deal this size to increase returns for everyone. Also, don't forget about cost segregation. IMHO once a property reaches $1MM+ then it makes sense, cost-wise, to do a cost seg study.
@Scott Krone , @Dan Handford , @Jeff Greenberg thanks for the replies...the light value add is like paint, management replacement, appliances and landscaping. Limited heavy out of state lifting. This is a friends and family deal to get comfortable with the syndication model, provide decent returns then improve on the model. Thoughts and feedback appreciated.
If not a pure syndication with 10ish investors, what would be a better way to structure the investment package? The goal is to gain experience with a small win.
@Mark Doty If the 10 investors that you are wanting to bring in on the deal are going to just provide money and nothing else then you would be needing to discuss this in more detail with an SEC attorney as you are now selling a security which is why it would be considered a syndication at that point. This applies even if the 10+/- investors are just friends and family.
@David Walkotten thanks for the suggestion. How long is your term on that loan? Congrats on the 40 unit! On the preferred return, are you looking at like 8-9% or more than that?
@Dan Handford understood on the syndication point. It’s a security if the partners don’t have another role in the deal, correct? My understanding is that if the people investing (which doesn’t matter if it’s 3 people or 100 -I don’t think) don’t have an active role or responsibility outside of the money, then the deal should be structured as a security.
After completing the friends and family deal, I will next have to decide how to market and whether the investors are accredited or not...but that’s down the road for me. Thanks for the tip and feedback!
@David Walkotten thanks for the details...really helpful! Do you pay out on monthly/quarterly cash flow too?
@Mark Doty I second what @Dan Handford mentioned above about your investment potentially being a security. In terms of investors roles, being active translates into everyone having to do something for a deal. If that's your plan, then you'd have to come up with a very detailed Operating Agreement stating everyone's responsibility to avoid conflicts and/or questions down the road as to who's responsible for what in a partnership. Again, it's worth a conversation with a securities attorney.
Perhaps someone experienced as @Kim Lisa Taylor .
@James Lusk thanks for the numbers. I thought it would have been more!
This is no mans land for investing because you are getting the worse terms and recourse debt until going over 1M loan size.
@Lane Kawaoka thanks for the insight...sounds like from you perspective it would be better to go after a minimum of a 1.25M property to obtain better financing, so that the loan exceeds that $1M threshold. Am I reading your comment correctly?
@Alina Trigub thanks for your comments!
25% down payment sounds accurate. You need an operating account fund for unexpected maintenance issues, dips in occupancy, etc., which can be 1% to 5% of the purchase price (depending on the current condition).
If you are funding the renovations out-of-pocket, you will need to raise that. I would add in 10% to 15% of the total rehab budget for contingency.
Closing costs are usually around 1% of the purchase price. There are also financing fees to pay for due diligence, loan applications, legal, etc., which are around 1.75% of the purchase price.
If you charge an acquisition fee, you will need to raise that too.
The 10% liquidity doesn't need to be raised. The lender will need someone to sign on the loan with a balance sheet with 10% of the loan amount and a net work that is 100% of the loan amount. They will also likely want someone who has past experience doing a similar sized deal to sign on the loan too.
@Theo Hicks thanks for the response and additional comments!