Is it common for apartment syndicators to raise private capital or use Hard money to use towards EMD of a property? With EMD typically being around 1% of purchase price, your EMD along with other up front fees can be much more than most investors have in liquid cash. Is this common and what are the pros and cons?

If you've pre-raised funds for an unkown acquistion, I suppose you would be doing that (such as a fund). Most of the syndicators I know raise money for a specific property, and come up with the EMD out of pocket.

Personally, raising funds for an EMD would be a red flag for me. If they are that skinny on funds, is the deal too big for the syndicator to handle? They would need to put extra effort explaining their qualifications. It would probably be better to partner with someone that has enough cash to be the source of the EMD funds.

@John Cameron , established and many new syndicators put up the EMD from their own pocket, so the standard LP is never on the line for that. Most frequently, my friends that have syndicated a deal use their own cash, and often buy a stale listing at full price, just to get a reduced EMD (I have heard of $50k on a $7mm purchase), so slightly less than the 1% that is typical.

Common alternatives, if you do not have the EMD on hand, is bringing in more partners at the GP level, or bringing in a KP that typically shares at the GP level.

HM  only lends on the property they dont give out EMD..  

That sounds like double, triple the risk!!

@Evan Polaski would most GP's that come into the deal with their own money for EMD require collateral from the partners not putting in money? Just trying to figure out the common practices. Thanks!

@John Cameron

If a syndicator doesn't have funds for EMD out of pocket, that would be a sign that they don't have enough experience. I'd be willing to bet they are fresh out of a bootcamp or training seminar.

In my opinion, you should start with smaller deals and cut your teeth on those. You will learn a lot and be able to do better by your investors in the future. A $5,000 lesson across 300 units is painful.

Originally posted by @Jim Kittridge :

@John Cameron

If a syndicator doesn't have funds for EMD out of pocket, that would be a sign that they don't have enough experience. I'd be willing to bet they are fresh out of a bootcamp or training seminar.

In my opinion, you should start with smaller deals and cut your teeth on those. You will learn a lot and be able to do better by your investors in the future. A $5,000 lesson across 300 units is painful.

 Great point! 

@John Cameron

It seems like you got a resounding No, it's not common to used borrowed funds for EMD.

I will just reiterate, it would be a red flag if a sponsor or general partner would be asking for money for the EMD. We typically see funds from investors go into escrow a week or 2 before closing and then the remaining capital is dispersed from escrow to the company after the deal has closed.

It would be a red flag if s syndicator was asking or requiring LPs to deposit capital for an EMD aka risk capital. What's not unheard of is there to be a KP or strategic capital partner in the GP that provides a balance sheet as well as capital for an EMD in exchange for a slice of the GP and or a fee.

Deals in today's market are competitive and it's not unheard of to see $1M in earnest money due at signing of the contract. For even successful syndicators that's a decent amount of capital to tie up, especially if you're pursuing additional opportunities. 

@John Cameron we can help with EMD. It's common to negotiate a % of the deal for placing EMD.

@John Cameron at least a personal guarantee

@John Cameron - You can partner with someone to cover the EMD. We often call this the "Risk Capital" in our Partner Driven deal buying group. For people who are putting up that risk capital can then earn a part of the GP (General Partnership) and earn somewhere in the 5-15% range for putting this $ up.

They are taking the risk, because if the deal doesn't close, they forfeit the capital. However the upside is pretty huge when the deal does close. 

This is one of the benefits of partnering on these deals is that everyone can get their lick & focus on where they can be value add. 

@John Cameron You shouldn't put LP money on the line to get the deal - especially if the deposit is hard, aka non-refundable from day 1 (which is not uncommon in the market just for your offer to be considered). 

Usually it is your own money or your partners (GPs) money that you use for EMD, or bring in a KP. I'd be concerned as an LP if the operator didn't have enough liquid capital for the deposit on a deal they were raising money for.