All Forum Posts by: Andrew Noway

I agree with @Jonathan Godes. 

You say that "I have always thought 1% of the assessed value was a good maintenance budget." I've never heard this before. Installing a roof on a 10 million dollar 2000 sq. ft home in NYC is the same cost as a 100K 2000 sq. ft home in Atlanta (all else being equal). You would be better off setting a management budget based on the age, condition and sq. footage of the home. 

If this is a long term hold, $50/month * 12 * 5(years) = $3,000. Unless you do all the repairs yourself, that is simply not a realistic number. How old is the HVAC, roof, water heater(s), etc.? If they are all new when you bought, then $50 set aside for maintenance is OK if you do all of the fixes yourself. Otherwise, I would at least double that number in your projections. 

I don't know about where you live, but in Virginia I use a real estate attorney for closing. Everything is pretty cookie cutter (purchase agreements, title search, inspections, etc.) and I prepare most of it. I only use a lawyer as cheap protection—he charges me around $300-$500 per deal. Obviously that $300-$500 can add up if you're dealing with a cheap property with a sensitive cap. 

This fight right now between @Bob Bowling and @John D:

Thanks for the advice everyone. After speaking with the MP, I have a better handle on the investment. It turns out that the waterfall to the second and third tier does not begin until all principal is paid back + 9% return. This should occur around year 5 or 6. Only after that does the 30/70 and 50/50 splits occur. 

MP gets 2% annual "management fee" along with the 85K acquisition fee, so there is really no way for MP to lose money on this...I guess he wouldn't do most deals if he could. At the end of the day I made more conservative estimations (by ~10%), and am still happy enough with the return. From a levered XIRR perspective i'm looking anywhere from 15-20%. If things go the way MP predicts, it will be around a 25% XIRR (~3x multiple).

@Brian Moore - Acquisition fee is listed separately from Legal, brokerage, title, appraisal, zoning, etc.  It is a flat fee that I am assuming his time was worth for acquiring the deal. To be honest, if it was 85K and then the waterfall wasn't so lob-sided (or if he was the one managing the property), I would not feel so uncomfortable. 

@Joe Belman - Managing Partner and Limited Partner. http://www.nolo.com/legal-encyclopedia/partnership...

Thanks for all of the comments thus far. I should also mention that 2% is shaved every month for management fees (not the syndicate). The deal looks good on the surface, which is why I am seeking advice. It's concerning how little skin is involved from the MP. 

For a commercial medical building:

Basics

Building Purchase Price: $4,000,000

Building Appraisal: $4,300,000

Estimated Deal Term: 10 years

Senior Debt: 3 million

Equity Raise: $1,000,000

Acquisition Costs: $85,000

MP Contribution: $50,000 (5%)

LP Contribution: $950,000 (95%)

Returns

Pari Passu: 9%

After 9% IRR: 30% MP, 70% LP

After 15% IRR: 50% MP, 50% LP

Estimated multiple

LP Equity Multiple: 2.55x ($1,500,000 total)

MP Equity Multiple: 20.86x ($1,000,000 total)

Of course, I shouldn’t necessarily be looking at what the MP (syndicate—an individual in this case) makes on the deal. I should look at the LP numbers and, if they make sense after DD and I am comfortable with the return, I should move forward.

However, this deal appears to be very rich for the MP. After an 85K acquisition fee, they are netting some serious returns with only 50K skin in the game (which probably came from the acquisition fee). Can anyone more experienced with commercial real estate take the general temperature of this deal and give thoughts? Is this disparity between LP and MP larger than usual?

Thanks in advance!