Underwriting - Feedback Needed

6 Replies

I need direction in underwriting a syndication deal with some business colleagues that want to invest in my real estate company. I have been a part-time investor for the past 5 years in the Jacksonville market growing my portfolio leveraging tax deed single-family homes. During that time, I have been communicating the progress during my monthly Mastermind meetings and they push me to present an opportunity so they can partake in the real estate market. So this past week I presented my process and they loved it. And they offered me an initial investment amount and asked my terms, this is where I need your help. How should I structure the terms and what should it be?

@Silenceux Francois Determine the roles. If they are providing capital, then write them in as investors. Typical syndications are 30/70 equity ownership, 30 GP (syndicators) / 70 LP (investors) with a 6-8% preferred return. Ensure a return is around 12-15% for a 5 year hold and you will be on par with most syndicator/operators.

I suggest finding out what they are looking for, what roles are needed or they want to fill and meeting those requirements with your offered terms.

I agree. It really depends on the type of project, capital invested and roles of each person. If this is truly a syndication with passive investors, you'll need a syndication attorney to actually structure the deal. But like Chris mentioned, a 30/70 split is very common.

Also, congrats on your success!! Awesome!!

I would run the the numbers and see if you can achieve a cash in cash return yearly of 8 percent per and have a 5 yr IRR 16 percent or higher. The higher the risk, the higher the return.

@Silenceux Francois It depends on the deal. Sometimes if the deal is front-loaded both the general partners and limited partners will be receiving a split from day one, fees are not as necessary. However, as we *were* in the peak of cycle, most syndications were/are back-loaded meaning alot of the returns for general partners or limited partners were/are found on the back end or sale due to value-add long term plays. In these cases, fees are typical because otherwise there is little incentive for general partners who also have to make a living.

We have utilized an asset management fee as well as an acquisition fee in some of our deals. Typically the asset management fee is about 1% of cashflows/rental income annually and the acquisition fee can be anywhere 1-4% of the purchase price. Some syndication also use a capital transaction fee at transaction or even a disposition fee at sale.

Every deal will be different and ensuring the structure is clear and understood to both general partners and limited partners is important. Transparency and integrity in the investments are essential for long term partnerships or repeat investments.