84 Unit Complex- How would you structure the deal?

Multi-Family and Apartment Investing
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84 Unit Complex- How would you structure the deal?

Canesha Edwards
Developer · Atlanta, GA · Member since 2014 · 475 posts · 424 votes

Good morning all,

I have a unique opportunity with an 84 unit complex in Atlanta. I received a call from one of owners of the complex. The group has owned the complex for 20+ years, and while they aren’t in a hurry to sell, I get the sense that if made the right offer, the would happily sell. The owners are willing to sit down and talk with me but only once I prove I’m a qualified buyer and can get the deal done.

Here’s where the problem comes I’ve never done a deal like this and I don’t have the capital for the down payment. I would like to bring on equity investors to raise the down payment. I was thinking of a 70/30 split. Does that seem fair? I will manage the property instead of outsourcing to a PM. The property is 15 minutes from my house. I’ve reached out to an SEC lawyer to see my options are here and if needed I have the funds to cover all SEC associated fees.

I understand all the odds are pretty much stacked against me but passing this deal off to another investor for a fee isn’t an option I’m considering right now. I’m looking for solutions to my problems to get the deal done.

All feedback is greatly appreciated.

Canesha

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Michael Ealy
Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
6y
Originally posted by @Trent Chance:

@Canesha Edwards I'd still take an acquisition fee if I were you. I think it's standard and shouldn't affect your equity.

Maybe see if @Michael Ealy has any ideas for you to find a partner or on structure

 Thanks Trent for the mention.

Canesha, since you can't qualify as a buyer by yourself, be HONEST with the seller and tell him that you can't. However, tell him that you can line up high networth individuals you know who can partner with you on this deal.

Ask him basic things that will give you an idea whether this deal makes sense or not. Ask him the average rent per unit. Research the area (is it A, B, C, D, or F). Ask him old is the building (or you can search public records to find out when the building was built). Based on that, you can have an idea whether the deal is a good one or a bad one based on his asking price.

Once you know the deal has potential, approach the other high networth individuals you're talking about. 

Are these high networth people experienced apartment investors? Or are they just there to put up the money? As @John Casmon and @Greg Dickerson point out, in order for you to even get bank financing on this, they will require 2 things which you don't have (or actually 3):

1. If you want to borrow $1 Million, you need to have a net worth of $1 MILLION

2. You need apartment investing experience (specially since we're talking 84 units here)

3. Banks will also have some LIQUIDITY requirements. Depending on the lending institution you talk to, they will require 6 months of mortgage payments + 20% (or sometimes 25%) down as cash in a bank account you control

In other words, you need to structure it this way:

A. You need an experienced apartment investor as partner who can be on the loan - likely 50% partner

B. You need 1 or 2 money partner - likely 40% partner

C. You - 10% partner

Makes sense?

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  • Erik Hatch
    Rental Property Investor · USA · Member since 2018 · 325 posts · 222 votes
    6y

    @Canesha Edwards what’s the noi and the cap rate for the area? That’s going to start to tell you the value. This isn’t the most difficult thing to do but I’d suggest hiring a pm. The property is large enough to warrant it. Besides, you need the time to manage your next deals. Read up on syndication. PM me if you like. 

    1Reply
  • Michael Reilman
    Rental Property Investor · Cleveland, OH · Member since 2019 · 67 posts · 37 votes
    6y

    @Canesha Edwards

    Hi Canesha,

    Sounds like you are doing the all the right things, like working with an SEC lawyer.

    A 70/30 split is pretty typical, so to answer your question, yes. A lot of deals today have a % Preferred Rate of Return also for investors.

    Maybe your best bet is to partner with someone who has raised money before? Do you have enough investors to raise the money? If so, you’re only issues are SEC compliance and if the investors trust you can manage the property yourself.

    Sounds like a great opportunity since you are talking to the sellers direct.

    0Reply
  • Canesha Edwards
    OP
    Developer · Atlanta, GA · Member since 2014 · 475 posts · 424 votes
    6y

    @Erik Hatch

    Hey Erik,

    I’m working on the preliminary numbers still. The property is located in a C class area, but only 15-20 minutes from Downtown Atlanta. So, I have the cap rate at around 7.5-9%.However, from the properties website, some units have been renovated, others haven’t. The owner isn’t willing to provide this information until I can prove I’m a qualified buyer. Doesn’t want to waste his time if I can’t close. So, all my numbers are based on the area instead of the property, until I can confirm. I’m going today to visit other complexes in the area to see if I can get a better feel for market rents, property conditions, etc.

    1Reply
  • Canesha Edwards
    OP
    Developer · Atlanta, GA · Member since 2014 · 475 posts · 424 votes
    6y

    @Erik Hatch

    I’m not opposed to hiring a PM. I wouldn’t mind keeping the current PM in place if it makes sense to do so.

    0Reply
  • Canesha Edwards
    OP
    Developer · Atlanta, GA · Member since 2014 · 475 posts · 424 votes
    6y

    @Michael Reilman

    What’s a standard preferred return for a deal of this size? I honestly didn’t want more than five investors...Trying to avoid having to comply with the SEC. I have a few who I have been working with who are looking for something like this but nothing substantial.

    I’ve reached out to a contact at Franklin Street to see if he could help or point me in the right direction.

    0Reply
  • Greg Dickerson
    Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
    6y
    Originally posted by @Canesha Edwards:

    Good morning all,

    I have a unique opportunity with an 84 unit complex in Atlanta. I received a call from one of owners of the complex. The group has owned the complex for 20+ years, and while they aren’t in a hurry to sell, I get the sense that if made the right offer, the would happily sell. The owners are willing to sit down and talk with me but only once I prove I’m a qualified buyer and can get the deal done.

    Here’s where the problem comes I’ve never done a deal like this and I don’t have the capital for the down payment. I would like to bring on equity investors to raise the down payment. I was thinking of a 70/30 split. Does that seem fair? I will manage the property instead of outsourcing to a PM. The property is 15 minutes from my house. I’ve reached out to an SEC lawyer to see my options are here and if needed I have the funds to cover all SEC associated fees.

    I understand all the odds are pretty much stacked against me but passing this deal off to another investor for a fee isn’t an option I’m considering right now. I’m looking for solutions to my problems to get the deal done.

    All feedback is greatly appreciated.

    Canesha

    You will not be able to get financing for this deal yourself. In order to get a loan you are going to need to partner with someone that has experience and either owns properties like this or has successfully exited. You also need to raise equity etc. Best thing to do is reach ut to experienced operators and get them involved. You will need to take a back seat (minority share) but at least you can get in the game. A little bit of something better than all of nothing.

    5Reply
  • Canesha Edwards
    OP
    Developer · Atlanta, GA · Member since 2014 · 475 posts · 424 votes
    6y

    @Greg Dickerson

    Greg!! How are you? It’s been a while. Your insight is always greatly appreciated. Are you suggesting I up the equity split, say 85/15 or more? I’m willing to get the deal done at all cost, I just want a fair ownership stake ( whatever that is) and a hand in the process for my own person development.

    0Reply
  • Greg Dickerson
    Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
    6y
    Originally posted by @Canesha Edwards:

    @Greg Dickerson

    Greg!! How are you? It’s been a while. Your insight is always greatly appreciated. Are you suggesting I up the equity split, say 85/15 or more? I’m willing to get the deal done at all cost, I just want a fair ownership stake ( whatever that is) and a hand in the process for my own person development.

    Hi Canesha - What I am saying is you will not be able to pull this off without an experienced sponsor. You need to raise the capital and there are net worth requirements, experience requirements etc to get a loan. Assuming the deal even makes sense (you said they would sell at the right price) you will need to bring this deal to a sponsor in exchange for a very small percentage of the GP. You are not in a position to ask for much unless you have a seriously great deal, significant capital or expertise. First step is to get an idea of the NOI ad how much it will take to purchase the property. You don't want to bring the deal to people if its a non starter.

    2Reply
  • Canesha Edwards
    OP
    Developer · Atlanta, GA · Member since 2014 · 475 posts · 424 votes
    6y

    @Greg Dickerson

    Great point. I don’t want to waste my time or anyone else’s if the deal doesn’t make sense. Thanks for the action items and insight!

    0Reply
  • Erik W.
    Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes
    6y

    Speaking of wasting time, I am curious why the Seller doesn't want to "waste his time" providing you the information?  If wants to sell, he is going to have to provide this information to Buyers at some point.  Therefore, it should be in a spreadsheet or on a form of some kind.  Once it's put together, sending it to you should take no more than 10 seconds.  I don't understand where the "waste" is.  Getting one's ducks in a row and laying out all the information for Buyers is part of a Seller's sunk cost of time and is going to happen regardless at some point.

    You can phrase it nicer to him, of course, but the bottom line is he's going to have to provide the info at some point.  Why not get it ready today and share it with you?

    5Reply
  • Scott RunyanPro Member
    Rental Property Investor · Atlanta, GA · Member since 2014 · 29 posts · 29 votes
    6y

    A 70/30 split sounds reasonable, and most syndicated deals I'm seeing are around an 8% preferred return. But Greg is right. Without someone with experience on a property like this, getting financing will be next to impossible. Also, your cap rate of 7.5%-9% seems very high for Atlanta. Most deals I see in the area are in the 5-6 range. Even for value add C deals. Not a large spread between B/C right now in Atlanta especially within a 15 min drive to the city. I'm in the area, please feel free to PM me if I can help in any way. 

    2Reply
  • Dj Hume
    Rental Property Investor · Cincinnati, OH · Member since 2019 · 55 posts · 49 votes
    6y

    @Canesha Edwards Hi Canesha! What an awesome opportunity! Here's my thoughts on structure deal. I typically provide our investors with a 6% preferred return then a 70/30 split after the preferred return. This incentives you to manage the deal property.

    Structuring the deal should be the easy part, we need to first deal if there is a deal to structure :)

    You'll need to figure out the current NOI, is there a value add opportunity (which sounds like there is) then determine how that will affect the NOI. I'd suggest crunching the numbers with someone who's done a few of these deals since you'll have construction costs involved which will affect vacancy and cash flow.

    Hope this helps!

    Dj

    1Reply
  • Canesha Edwards
    OP
    Developer · Atlanta, GA · Member since 2014 · 475 posts · 424 votes
    6y

    @Dj Hume

    Thanks for your insight. You’re absolutely correct, gotta make I have an actual deal first. I was able to speak with the leasing agent today who was able to give me current rental rates for the property and the unit mix. This should be enough for preliminary numbers. I plan to spend today crunching the numbers, to see if there’s actually a deal.

    The owner is very serious about not wasting his time and is requiring a proof of funds letter before even entertaining an offer. So, my hope is that I can put together a package good enough to at least secure a funding commitment, So I can really get the ball rolling.

    1Reply
  • Dj Hume
    Rental Property Investor · Cincinnati, OH · Member since 2019 · 55 posts · 49 votes
    6y

    That's awesome! I'd be happy to double check your numbers - analyzing deals is what I do for fun :)

    1Reply
  • Dominique Palmer
    Rental Property Investor · New Orleans, LA · Member since 2018 · 87 posts · 45 votes
    6y

    @Canesha Edwards good luck with everything. Interested to hear how the process goes.

    0Reply
  • Bobby Larsen
    Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes
    6y

    It's common for off-market seller's to withhold financials and a rent roll before seeing an offer or proof of funds.  Since you need help with equity, financing, and deposits, it does sound like your best option is to partner with another syndicator and co-sponsor.  If you're able to, raise the equity pursuant Rule 506 of Regulation D and your legal fees shouldn't be too high and they are passed on to the property as close anyways.  Bringing equity and sourcing the deal will allow for a much better split with the co-sponsor as well.

    As for the fees, it depends on if you're charging an upfront acquisition fee or not.  With or without an acquisition fee, 70/30 sounds reasonable but on the aggressive end if you're also charging an acquisition fee.

    Definitely hire a PM at that size, a co-sponsor would most likely require it.  You should have one full time leasing professional and a full time maintenance professional.

    0Reply
  • Canesha Edwards
    OP
    Developer · Atlanta, GA · Member since 2014 · 475 posts · 424 votes
    6y

    @Dj Hume

    I will be taking you up on that offer. Shoot me a PM with your email.

    Thanks!

    0Reply
  • Canesha Edwards
    OP
    Developer · Atlanta, GA · Member since 2014 · 475 posts · 424 votes
    6y

    @Dominique Palmer

    I will definitely take you up on that offer. Shoot me a PM with your email.

    Thank you!

    0Reply
  • Canesha Edwards
    OP
    Developer · Atlanta, GA · Member since 2014 · 475 posts · 424 votes
    6y

    @Bobby Larsen

    All good points! I’ll start looking into PMs as well. However, since I plan to do more of these deals, I would like to get to a point where I’m (my company) is vertically integrated and can manage properties in house.

    I’m not looking to charge an acquisition fee. Having a higher equity stake is more important that getting the fee. In bringing on a co-sponsor what’s the standard split there?

    Thanks for your insight.

    Canesha

    0Reply
  • Bobby Larsen
    Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes
    6y

    @Canesha Edwards 70/30 over a 8% preferred is very reasonable for investors then.  Unless it's one investor/group that's considered institutional in which case they may try to bump that 8% up a point or two but I'd push back because it's an off market deal.

    I'd aim to have 1500 units in one area before I'd start an in-house property management company but that's just my opinion.  A good rule of thumb is one leasing employee + one maintenance employee per 100 units.

    If a co-sponsor is just providing the deposits until close and the credibility/networth for financing then I'd say it could be structured either as a % of the GP or as an upfront fee or a combination of both.  Opinions on this will vary widely so I'm just throwing out best guestimates but 25% of the GP split or 1-3% of the loan amount if an upfront fee which your investors would ultimately fund through their investments.  If a co-sponsor is providing deposits, financing, and equity then I'd expect a minimum of 50% and perhaps up to 75%.  If they're providing all of that then you're basically a broker providing an off-market deal at the end of the day and I'd expect them to control the deal and for you to receive 1-3% of the purchase price.  Then again if it's a screaming deal then all of these estimates could be much lower.

    1Reply
  • Trent Chance
    Member since 2019 · 94 posts · 75 votes
    6y

    @Canesha Edwards I'd still take an acquisition fee if I were you. I think it's standard and shouldn't affect your equity.

    Maybe see if @Michael Ealy has any ideas for you to find a partner or on structure

    1Reply
  • John CasmonPro Member
    Cincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes
    6y

    @Canesha Edwards How did you come across this deal? When you say you received a call, was it in response to a direct-mail campaign? A lot of sellers have high expectations of what their property is worth, so try to get a sense of the deal's potential.

    As @Greg Dickerson pointed out, you will need partners with the networth and liquidity to qualify for a loan. Do you have experience managing or operating deals of this size? Self-managing an 84-unit AND bringing on investors without experience would be a major concern. 

    Lastly, you would need to build great rapport first, but if current owners have had the property 20+ years, you may be able to entice them with seller financing. 

    1Reply
  • Canesha Edwards
    OP
    Developer · Atlanta, GA · Member since 2014 · 475 posts · 424 votes
    6y

    @Bobby Larsen

    I have relationships with a few high net worth individuals, so I might be able to raise the equity myself. Either way, my intentions are to stay a part of the deal any way possible.

    @Trent Chance

    I’m considering all options. I would hope to receive higher equity in the deal if I’m not taking anything up front.

    @John Casmon

    I went old school and wrote the owner a letter. He appreciated the effort and gave me a call. :)

    The SEC lawyer mentioned another option. Member-managed LLC......has any one structured a deal this way? Pros/Cons?

    Thanks!

    Canesha

    0Reply
  • Canesha Edwards
    OP
    Developer · Atlanta, GA · Member since 2014 · 475 posts · 424 votes
    6y

    @Erik Whiting

    He wants to qualify me as a buyer before he provides the information. Why waste time if I can’t close the deal?

    0Reply
  • Michael Ealy
    Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    6y
    Originally posted by @Trent Chance:

    @Canesha Edwards I'd still take an acquisition fee if I were you. I think it's standard and shouldn't affect your equity.

    Maybe see if @Michael Ealy has any ideas for you to find a partner or on structure

     Thanks Trent for the mention.

    Canesha, since you can't qualify as a buyer by yourself, be HONEST with the seller and tell him that you can't. However, tell him that you can line up high networth individuals you know who can partner with you on this deal.

    Ask him basic things that will give you an idea whether this deal makes sense or not. Ask him the average rent per unit. Research the area (is it A, B, C, D, or F). Ask him old is the building (or you can search public records to find out when the building was built). Based on that, you can have an idea whether the deal is a good one or a bad one based on his asking price.

    Once you know the deal has potential, approach the other high networth individuals you're talking about. 

    Are these high networth people experienced apartment investors? Or are they just there to put up the money? As @John Casmon and @Greg Dickerson point out, in order for you to even get bank financing on this, they will require 2 things which you don't have (or actually 3):

    1. If you want to borrow $1 Million, you need to have a net worth of $1 MILLION

    2. You need apartment investing experience (specially since we're talking 84 units here)

    3. Banks will also have some LIQUIDITY requirements. Depending on the lending institution you talk to, they will require 6 months of mortgage payments + 20% (or sometimes 25%) down as cash in a bank account you control

    In other words, you need to structure it this way:

    A. You need an experienced apartment investor as partner who can be on the loan - likely 50% partner

    B. You need 1 or 2 money partner - likely 40% partner

    C. You - 10% partner

    Makes sense?

    6Reply
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