All Forum Posts by: Spencer Gray

Hey @William Kim

I've participated in several dozen syndicated projects, the vast majority being Midwest multifamily, first as an LP but now primarily as a GP/Co-Sponsor. Currently we have one project being sold, three being refinanced and will hopefully have another project under contract shortly (knock, knock). Besides Multifamily, we've invested in industrial, commercial as well as medical office buildings. Several of these projects have gone full cycle and were very successful. As much as I like some other asset classes, B class/workforce housing is, in my opinion, the best risk adjusted return available of any investment vehicle and the strongest commercial real estate asset class. That's where all of my personal attention is at. 

It's important to not only determine the competence of a sponsor but to make sure that your goals and strategies are aligned. I've made relationships with some top tier operators (billions in the pipeline) who are extremely capable but they simply have a different strategy, and not a bad one at that, it's just not my strategy. At the end of the day there are plenty of fish in the sea and it's more than just finding a team that you trust. You have to first figure out what you want out of an investment and what your specific (somewhat realistic) goals are. 

Let me know if you have any specific questions and feel free to shoot me a PM.

What does your contract with the seller say? Forward the PSA to the management company and if necessary have your attorney write them a strong letter outlining what they should have done, what needs to be done and the ramifications if they do not comply. 

Relationships with owners and brokers being known as someone who can execute quickly and has the capital.

I don't believe you need a physical Indiana address to register your Indiana LLC with the SOS. The process is very easy on https://inbiz.in.gov , it takes maybe 10 minutes. I could be wrong since I am in Indiana but I don't recall it being an issue when I've used the inbiz system. 

Not that I'm aware of. Many lenders, especially Fannie and Freddie, have a rule that considers any member that has 25%+ equity a key principal and often can be asked to guarantee the debt along with the sponsor. 

@Sam Grooms Good point. It's more "friendly competition" that isn't zero sum and a good deal is a good deal. My point was more that it's not a useful litmus test.

@Account Closed why would competitors invest in each other's deals? 

Have you ever participated in a syndication? You've given a lot of blanket advice recently that doesn't seem to come from much experience.

Here's a few the items on my list that I look for when evaluating a deal -

Debt - look for fixed rate debt with a term that is at least 7 years ideally 10+ years. Even with it's headaches, HUD debt with 35 year terms definitely make it easier to sleep at night (the REACS and surplus cashflow calcs don't help but that's for another topic). Does the deal rely on an extended interest only period? Does the deal rely on a refi at a specific time?

Operations - DD on  sponsor, DD on their assumptions, DD on the asset itself, DD on the PM if it's a third party. 

Market Analysis - Population growth, job growth, income growth, is area income less than 30% of target rent?, demographic makeup vs unit makeup.

Sensitivity Analysis - 

What is the breakeven economic occupancy? I'm looking 25% or less in the skinniest year (usually when the IO period ends)

What does COC look like if rent growth growth is flat?

What does the exit IRR look like if the cap rate is 100 bps, 200 bps, 300 bps, 400 bps above current market.

Taxes - What if there is a significant tax reassessment? What does that look like in the skinniest year. 

What if a combination of these issues happen all at once? 

There's more but if you can go through this list and you are still comfortable with your return you should be able to feel confident in the deal. 

At the end of the day as an LP you risk loosing 100% of your capital, having a capital call and choose to invest more or be diluted - and then you can loose that capital as well. It does happen, almost always with inexperienced sponsors.

Most lenders will require you to fund a reserve account at acquisition to be held in escrow. Different lenders require different reserve amounts and some will lend you the funds. While operating usually about 2% of gross rents are required to be added to the replacement reserve account held in escrow.

LLC's limit personal liability, they aren't meant to restrict businesses activity. That being said some businesses may have to organize under a different structure depending on what they do. If you are asking this you need an attorney. Most property management, investment, and holding companies that I am aware of are structured as al LLC, some as a LP.