Concept - a way to get a lot of ownership in deal WO more equity

4 Replies

This is my first forum post here so hello everyone! I just wanted to get some feedback on a Strategy I have been thinking about for either 1) getting much more ownership in a JV large multi family deal, or 2) getting into larger Multifamily with less cash.

Here is the concept - target large Multifamily properties that 1) have been on the market awhile to where the seller would be fairly motivated. 2) properties that have been held for a long enough time that the sellers should have significant equity or be making a large profit in a sale.

Typically buying large Multifamily as a sponsor you give up 70% of the ownership to whoever brings in the equity... but say you request the motivated sellers to put a large amount of their sale proceeds back into the deal on a preferred return basis and count this as equity YOU bring to the table! Then you hold that for a few years, do a value add play on the property through better management and upgrades and you refi out and payoff the sellers fully. Now you are sitting with much higher ownership as a sponsor (if not fully owned), with much less equity.

This could also be a very attractive way to raise capital! Say you know a creditable person that could leverage their name to get agency debt. Then you have sellers put in 75% of the equity need and your creditable partner put in 25% of the equity. You then give a pref and a 50% upside on the deal to your partner and keep 50% of the upside as the sponsor for bringing in the other 75% of the equity (though it was simply the sellers doing for wanting a quick sale). Your partner now has 50% of a deal that took only 25% of the equity need... would be hard to turn that down. Win-win-win! Sellers are able to sell and maintain a good investment for the next few years. Investor gets more ownership for less equity. You get more ownership as the sponsor. What are your thoughts on this strategy?

@Sean Wilkinson

You’re missing some key points. I’ll just address your first strategy. If you’re giving a preferred return to the seller for placing some of his sales proceeds in the deal, then that cash is coming from the cash flow due the equity investors, so the equity investors will be getting a smaller return and won’t invest. Further, why would the seller of the property invest on terms worst then the equity investors? I’m afraid your lack of experience and knowledge shows; your highly theoretical “find motivated sellers” etc, just isn’t the real world. Most sellers who are motivated are motivated because they have properties that they are having difficulty with. What makes you think you’d have a solution to the problem?

Further, your assumption that sponsors receive 30% equity for putting the deal together is very unlikely, although with some very experienced sponsors and some very naive investors it may have happened. I can tell you that we receive a 4.5% acquisition fee, we receive 8% of the cash flow as an asset management fee, and we receive 20% of the capital gains after the investors receive a preferred return. We also invest in10-15% ownership in the deal at the same terms as the investors. I do know some sponsors that do receive 10% equity as a sponsor for no cash investment, but they don’t receive the acquisition fee (which for us is paid by the seller as I hold a brokers license in five states), or an asset management fee.

Raising capital requires compliance with Federal, state securities laws, or both. Attorneys fees run a minimum of $10,000, and usually more for a Reg D exempt offering. It’s near impossible to raise capital without a professional web platform giving potential investors access to deal information, secure money transfer, financial status, and the ability to interact with other investors. A major criteria knowledgeable passive investors look for is how much hard cash the sponsor is putting into the deal. Since there are probably 5,000 real estate deals floating around at any one time seeking investors, and all the projections look rosy, investors have developed some eliminators to narrow the selection. Once an investor decided on type of property, location, minimum return, etc. the eliminators are likely to be sponsor investment, sponsor financial alignment with investor results, upfront dilution, equity dilution, and most importantly, sponsors track record. Your thought that investors are going to regard someone else’s investment as your “equity” is just plain lack of knowledge and experience on your part.

Here’s the bottom line; if there is some new wrinkle or strategy involved in real estate syndication, myself or others like me putting together real estate syndications for the last 20 years would have likely thought of it.

Another thought is where would you get the "Fix up" money from in this scenario, as well as operating capital, and Cap Ex reserves....(unless you have deep pockets yourself for this).

@Don Konipol Hi Don. Thank you for your thoughts here.  I was somewhat vague on this post in a first attempt at putting this idea to paper and getting others to track the thought process so I apologize there are still some missing pieces to the puzzle here. But that's what this tool is for –– for others to put holes in the concepts and improve them. Don't get me wrong, this is by no means a "by the book" strategy for a deal syndicator. I have personally worked in and around a boutique sponsor which owed at the time around 7000 units. I quickly realized that those numbers don't mean a whole lot without ownership and the ability to control the future of the deal. That is why it has become very important to me to figure out a why to hold properties long term with more ownership. I flipped homes for a while and that is essentially what I realized syndicating was on a large level. From a cash-on-cash return it can be great, but the constant disposition and acquiring is a massive undertaking for each and every deal with their various obstacles. I'm much more interested in long term indefinite yield from wholly owned assets that I would hope to sit on long term. So the question that lead to this post is "how can I scale to large multifamily and have a good amount of ownership with relatively little personal powder to put in the deal?" Now on the sponsor assumptions, as I'd imagine you know, this can widely vary. For instance, your fee structure is quite a bit higher than I typically see. However your ownership structure is quite accurate with what is usual, though I have seen sponsors achieve 30% split on heavy lift properties by not charging fees. The reason I mentioned the 30% is because I am trying achieve more ownership than I have seen even in the richest syndication deals.

Now Let me rephrase some of these points.. First addressing the sellers: if they would like to sell this deal and have had trouble selling, you are their buyer. You offer a decent sale price which they are hungry to take. They can sell and get what they want for the property as long as they take some of their proceeds and place in the deal for a few years as a decent preferred return. Again, not a "by-the-book" deal. 

Addressing the equity partner: Say the sellers put in 75% of the equity need. You now only need 25% of the equity and for that 25%, you are willing to give 50% of the upside of the deal along with a pref. As a partner/investor, I would take this deal any day if numbers made sense and it was a solid deal of course. Why would they care if you had 50% of the ownership and the sellers were only making the preferred return if they got 50% of the deal with only 25% the equity need? 

Bottom line on my end is I am 23 years old, own 88 doors by in most cases getting very creative.. I also have a 250 unit deal in the pipeline with this exact structure outlined above that I have talked to both sellers and equity sources and and it is looking like it might potentially work. Everything is still up in the air but if it works, it'll be something I will undoubtably continue to pursue as a strategy to maintain more ownership. 

Again, Appreciate your wisdom you have to share from your 20 years of experience and I welcome any other holes you can put in the idea. Thanks!

@Scott Mac Hi Scott, the idea would be to obtain a bridge type loan on the purchase where the lender would hold a Capex reserve. This does make the equity need slightly more, but on a bridge product you can get 75%-80% LTV. If Cashflow could not cover operations, you would have to capitalize accordingly (or have deep pockets!).

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