All Forum Posts by: Enrique Huerta

I'm not a rent control investor, but the most common situation even for smaller assets (like your 6-unit building) is tenant buyouts. Most firms I've discussed this with will budget between $18,000-$25,000 per tenant. Per @Lee Ripma 's post, there's a huge ROI on this, because even if you get half the building from 50% BMR to full market rents, you've added subtantial value and can flip the asset.

@Christopher Morgan

CoStar, Census, Axiometrics, REIS, Real Capital Analytics, Yardi, Realpage, NMHC

@Chris Lawrence if you have a solid business plan in place, a bridge lender will lend on proforma. Just make sure you can execute because the risks are higher.

@Allyssa McCleery I know you didn't ask me, but I previously worked for an investment firm that utilized bridge debt financing for a majority of their acquisitions.

 The underwriting is similar to any other lender, but often times the bridge lenders will be more aggressive in extending leverage and they often times can lend on rehab costs as well, not just the value of the asset. They also lend based on proforma rents and stabilized operations, which is why they can finance the rehab portion of the deal as well (to an extent).

The terms vary substantially by the deal, but a recent deal I looked at was a 24-month note at 400 bps above the 30-day LIBOR (average rate of 6.54%) with an IO term of 24-months. Keep in mind this was a larger asset (>300 units) and I don't think you'd get as attractive options with a 7-unit property.

@Anders Jax

I think @John Fortes is right. They may be proposing a vanilla JV versus an actual syndicated transaction, hence why they want a single LP and a simple 50/50 split.

But to answer your other questions,

"They also want to have a non-fireable clause on the management fee, which seems way out of ordinary. Of course the LP should be able to fire the GP as the manager if they find a lower cost, competent manager, or its being mismanaged."

This is out of the ordinary. Any sophisticated investor would request a takeover clause to remove the manager and bring on a new one. When and how is to be negotiated, but this clause is pretty typical for operating agreements where the sponsor is also the manager...

"My role is finding investors, and maybe investing a bit of my dough for good faith (skin in game). I am never going to put contacts of mine into an unfair investment, or propose something offensively skewed in GP favor. So Im trying to get smart on the subject and talk to the GP and resolve issues first."

So you're an equity broker? If so, why not look for other investments if this particular GP doesn't fit what you're looking for?

"As well, is it typical for GP and LPs to have to personal guarantee loans?!?"

An experienced sponsor is usually the party responsible for being the guarantor on any loans, not the LP. Whether its personal or corporate guarantor depends on the project, financing, lender, etc. This can change if it's a newer JV, versus a more established sponsor.

Great! Irvine is a beautiful area. What brings you to Irvine?

You'll have to get more information on the interest-free loan. Are they collecting asset management fees based on equity they raise? 

Yes the 50/50+Pref is just a waterfall structure. The GP here is either trying to avoid making the profit split more complex by doing a straight 50-50 split, but how much equity are they investing in each deal? If it's the usual 5-10% co-invest with the LP doing 90-95% of the capital structure on the equity side, then I don't think 50-50 is fair to the LPs without some form of preferred return or alternative structure to split profits.

I think it should be a "normal" waterfall structure. Are you sure it's not?

Something like

12% Preferred return split pari-passu (according to equity invested (10% GP/90% LP for simplicity sake))

All profits after the 12% are split 50/50?

GP management fee sounds high. I'm not in hospitality so I could be wrong, especially because it's a smaller hotel and smaller assets command higher management fees, but 13% of revenue for any project sounds astronomical.

So what is your role in this transaction? Are you a passive investor? If so, don't be afraid to ask the tough questions. They should be happy and willing to provide answers to you.

I don't recall which data provider or financing firm published the report, but a bit of information was published stating that the majority of Americans live in smaller apartment buildings (<15 units). The larger properties are more "visible" but there seems to be more inventory of the smaller kind because that was more common in the era when older multi-family housing was developed.

The report was specific to certain markets, but I think you can get a feel for the truth of that statement by driving around. That is certainly the case here in SoCal where more people live in small complexes than the larger ones.

Food for thought. As the institutional-sized assets increase in value due to the large operators acquiring, renovating, and selling them, the overall rents get pushed up, including smaller assets.

Assuming you underwrite the asset, you should be fine either way.

Every operator is different and the investor base drives the GP/LP split. If it's a larger project, it's not uncommon for the LP Investor to be a single entity.

It's pretty tough to "understand all possible structures" from a book, let alone in this business where it's not often discussed how deals are structured with the outside world.

Regarding the structure you mentioned:

-Common to pay LP in full first (I've never seen it done any other way...why should GP get paid first? They're not taking the capital risk)

-50/50 Split is common for smaller projects, but even then the LP is usually offered a preferred return. Depending on the size of the project and the level of sophistication of the LP investors, this can change.

-I'm not sure about the "interest-free loan." Are you sure this isn't a different capital structure? Like Pref Equity or Mezz? If so, it would definitely have some kind of return requirement...

-You have to elaborate more on the loan and "phantom income"

What is your role in this transaction? What's the property type? Asset value? Business plan?

There's not a lot of info in books or online re: waterfall. If anything you'll find some on some other websites. IDK if I can post links so PM me if you want the links to those websites.

Following.

Usually, the MLS and Tax Records, along with data providers (CoreLogic, NARRPR, etc.) will have this data.

You probably need to either be a realtor or pay monthly fees to access this data.

I'm interested. Please DM me more details!