50-50 Equity Split doesn't seem right

[Amber Boskers]

Here's the scenario:

12 unit apartment complex

Off market

2 units month to month

10 units 12 month lease

Units are $300/month Below Market rents

Absentee owner

Property is free and clear

Purchase price $1,600,000

$50,000 closing costs

$24,000 acquisition fee to managing party

$500,000 cash by two investors

$75,000 cash by managing party

$200,000 rehab budget

Financing $1,300,000 of approximately $1,900,000 budget.

2 year time frame to rehab and bring units and rent up to market standard.

3-4 weeks vacancy per unit for rehab

Refinance at year 3.

Managing party wants 50-50 rental distribution split.

I'm concerned about several things:

1. Not enough cash.

2. Too much upfront debt.

3. Rehab term of 2 years is too high.

4. 50-50 doesn't seem right and am looking for feedback in this from seasoned multifamily investors.

Thoughts?

[Charles Seaman]

@Amber Boskers Here's my thoughts on the scenario you proposed.

1. Is it a JV or syndication? If it's a JV, then I'd cut the acquisition fee out.

2.  It seems like there's enough cash based on the budget that you detailed.  Why are you concerned that there's a shortage of cash?

3.  The debt is 81.25% of the purchase price.  This is reasonable for a well located, stabilized asset.

4.  The rehab term that you're referring to isn't just for rehab.  The rehab will be done much faster than that, but you have 10 existing units that are already leased.  So unless you're planning to buy those tenants out of their leases, then they're not going to happen right away.

5. If it's a JV deal, I don't think that it's an unreasonable split. The managing party is investing some of their own capital and it sounds like they'll be doing all of the work, so it's fair for a property of this size. If it's a syndication deal, then it's likely on the high side. But it all depends on what type of return the investors will be getting.