How would I structure an apartment syndication deal?

Question

Let’s say I want to get investors and syndicate a 10 unit apartment building. I create Blue Estate LLC ( manager managed by me ) and Blue Estate Equity Fund I LLC which holds title to the 10 unit apartment building ( manager managed by Blue Estate LLC )

Syndication fees are 1% asset management fee of total capital raised paid each your to Blue Estate LLC, 1% of purchase price paid to Blue Estate LLC and 1% of sale price paid to Blue Estate LLC. 70/30 profit split with 30% to me as an individual and 70% to investors. 6% preferred return.

The purchase price is $1m I put that $250k raised from investors. I finance $750k with an interest only loan with a 4.5% rate.

I rent each unit out for $1k so 10 * $1k = $10k * 12 = $120k and let’s assume 50% goes to expenses so an NOI of $60k.

That’s a 6% cap rate when I buy the building for $1m. Since the debt is $750k at a 4.5% rate interest only my annual debt service is $33.75k. My NOI of $60k - $33.75k = $26.25k then divided by the downpayment of $250k is a 10.5 Cash on cash return.

$250k * 0.06 = $15k and since I pay investors a 6% preferred return do I pay them first $15k then distribute the remainder $11.25k in a 70/30 ratio with an additional $7.875k going to investors and $3.375 going to me. And I repeat each year.

Your probably thinking why pay management fees to Blue Estate LLC instead of yourself. The reason why is because I want to start a big real estate private equity firm in the future. By setting it up like this I could say my firm has millions of dollars of AUM which could help with showing a track record and crowdfunding for future deals.

Could someone please explain legal fees, registering with the SEC, setting up a PPM etc.

Do you like my structure? Any suggestions?

Alina Trigub · Answer

Account Closed

As @Greg Dickerson mentioned, educating yourself further is critical in this business. So start with "it's a whole new business" and "best ever syndication" books, Listen to podcasts, such as "syndication show" by @Whitney Sewell.

Also, if your interest is apartment complexes then study up on MFH investing. The two of David Lindahl books are a great start.

Speaking with securities attorneys is essential as well. Many of them attend and present at REI conferences all over the country. Easy to find on BP or Google it. Which leads me to my last important point: networking is the key in this business!

Best of luck!

Greg Dickerson · Answer

Account Closed you have a few things askew here. First there is a huge difference between syndicating a single deal and setting up an equity fund. You should research the two so you fully understand the difference. I suggest you stick with syndicating single deals.

As for the fees you would not charge a fee on capital raised from investors. Generally what you see and is common is to charge an acquisition fee, asset management fee based on the income generated by the property, refinance and or disposition fee on exit.

Yes you would pay any preferred return first after debt service then split any reaming profits as specified.

Syndication fees will vary depending on the asset and structures but you will be in probably be in the $10-$20k range for a smaller asset with a simple structure.

Overall it sounds like you really need to study up on the business and process of syndication including speaking to some SEC attorneys to make sure you thoroughly understand the laws and process around raising capital and structuring deals. You can find a lot of info on their websites for a start.

Account Closed · Answer

I am thinking about working in commercial real estate first. Do you suggest that I work as a commercial real estate broker at a brokerage firm to sell commercial properties and learn the game.

Account Closed · Answer

I want to start small then work my way up.

Do you suggest that I syndicate smaller single deals first like 10 unit apartment building with investors then work my way up to forming and equity fund investing in 100 units +. When I invest in single deals so you suggest I form a property LLC which I sell interests to investors.

Could you please explain how I would set this up like an example structure please.

How would I structure an apartment syndication deal?

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