All Forum Posts by: Spencer Gray

Hey @Gino Barbaro thanks for responding -

Do you think it makes sense then to close with a bridge even if the property is stabilized and then refinance to agency hopefully with a better T-3? Or if the asset is already stabilized go straight into agency to avoid the extra round of fees?

We have a great relationship with a local bank and almost always close with their bridge product regardless of being stabilized or not but have been contemplating whether it's worth it to just go straight to Fannie/Freddie. These are B class

moderate value add and hold/projects. 

@Jay Hinrichs 

Definitely true. Even more reason for plentiful permits and policies that encourage investment, not discourage.

The reason why rent is so high in DC, San Fransisco, NYC, Seattle is partly due to rent control, zoning restrictions, limited building permits as well as NIMBYISM. Investing (markets/capitalism in general) is a natural process and the most efficient way to manage the supply and demand curve and the allocation of resources.

The problem is scarcity exacerbated by local governments dissuading investment in new supply or the investment in improving existing inventory. 

Why would I buy an apartment and improve it if I can't increase rents to drive NOI? There's no incentive to do so, therefore I move to a different market where I can achieve yield. The result is apartment inventory falling into disrepair and going completely offline - further reducing supply and increasing scarcity.

I may want to build new, but with concerns of "gentrification" and further NIMBYisms local zoning boards are hesitant to allow "greedy" developers to build new units when the only solution to the problem of scarcity is new units. It's a viscous cycle.

The result of limited construction and limited investment into existing inventory ends up driving up rents even further as demand grows. Then the cheers for more rent control, more zoning restrictions, even the seizing of property are heard from citizens understandably frustrated by the high cost of living. It's much easier to blame the rich developer or investor than your fellow citizens or city councilman.

Clearly there is some speculation that drives prices, but if they're completely out of bounds the speculators pay the price.

An extreme example :

https://www.bloomberg.com/amp/news/articles/2019-0...

Thomas Sowell's take on Rent Control

@Justin Goodin 

Hey Justin - 

I've been active in apartment investing in Indy and surrounding markets (4 hour drive) for about 4 years now. We could go into a long discussion about any one of your questions but I'll try and give you my personal abridged experience (may not be for everyone or is the best). 

First though, let me just say I'm not a big fan of deals that don't support onsite management and are less than 75 units for several reasons.

There's no way when I was getting started I could go in with my partners and take down a 100+ unit property, but at the same time we knew that the larger deals are where the real economies of scale are, easier to sell, better quality product, etc. Therefore we partnered with several local operators in their syndicated deals as Limited Partners and eventually began co-sponsoring our own projects.

Most properties needed some level of critical repair if not a moderate to deep value add ($3500 - $15,000 / unit).

These deals most often involve bringing in investors either in the form of LPs or a joint venture with another real estate company, both in the form of a syndication (Reg D 506(b) or 506(c) ). Syndicating is great, but it's expensive and usually won't support a smaller deal (less than 30 units usually). So if you want to bring in OPM for smaller deals you'll probably need to do a more simple partnership with a one or two passive investors. 

I'm not a lawyer or CPA so don't take anything I've said as professional advise but that brings up your questions about your team. Some of my team I already had a relationship with (lawyer and CPA), I found everyone else via references from my existing team and through networking. Ask anyone who is in the business for references (broker, etc) and just start grabbing coffee or lunch to talk about what you want to do, and see if their expertise matches what you want to accomplish. For example I was using an accountant/book keeper in a previous business who we loved, but unfortunately she had no real estate experience and would have had to learn along with us - which is against the whole point of surrounding yourself with experts. 

Sorry if that was long winded. Let me know if you have any other specific questions.

Of those who are buying larger multifamily assets how many of you utilize a bridge loan before putting permanent financing in place opposed to going straight into permanent Freddie/Fannie debt (or HUD or any type of permanent financing)?

The Pros/Cons of utilizing bridge financing seem to be:

Pros: Flexibility, easier and more certain to close (depending on the lender).
Cons : More fees / expensive. 

Anything else?

Is it deal size dependent? i.e with a smaller deal ( >75 units) the extra fees might outweigh what the deal can support? 

What is your strategy / thoughts?

@Rafael Esteves

All the responses are spot on but I wanted to add a little more that might help.

For a value add strategy it's all about the ability of an operator to force appreciation by increasing NOI. That is done by either increasing revenue by raising rents and other income or by reducing expenses. Unlike SFR, the price of commercial real estate is almost always determined by it's financial performance, specifically a function of NOI / Cap rate. Therefore by increasing NOI the market value of the asset increases.

This forced appreciation can be quantified, even if not realized, pretty easily. Every $1 of increased NOI can be divided by the current market cap rate to show appreciation.

For example: 

Let's say that you own a 100 unit apartment community and by fixing up the units to some degree you are able to raise rents by $100 / unit. 

$100 x 100 units x 12 months = $120,000 of additional NOI

Then to quantify that forced appreciation in a market that is trading at a 6% cap rate - $120,000 / .06 = $2,000,000 !

The caveat on all this is that you don't realize the appreciation until you sell or refinance. If the market moves more bearish and cap rates move to say 8%, $120,000 / .08 = $1,500,000.

You can also allow natural appreciation, or cap rate compression, to increase the value however that strategy relies much more on speculation and market conditions.

So how does the sponsor make money? Every deal and sponsor are different but this is essentially how many sponsors operate - For the sake of simplicity, let's assume a sale has occurred and there are enough net proceeds to repay the LP investors equity in full + their annual preferred return and there is still $1,000,000 of cash available. If the cash split, or waterfall, is 70/30 then the LP investors would get their pro rata share of $700,000 and the sponsor will receive $300,000.

Sponsors also make money from fees and often by rolling those fees into the deal as LP equity that greats treated the same as other LPs. 

Hope this helps!

@Jake Wiley I just took a look at Cardone Capital's offering of their Fund IV and Fund V including going through their operating agreement and PPM. They are offering a 6% preferred return with a 65/35 split of cash flow. The funds are, from what I read, completely open ended in terms of what they can and invest in including the ability to invest in assets other than Multifamily. LPs also have more limited rights than other operating agreements that I have read for similar deals. 

None of this means that CC is a bad investment, that's up to the individual. But like @Alina Trigub said you're paying for his brand, and not only will the Toyota also get you there, in this case it may get you there faster. 

Grant is a very exciting guy and obviously great salesperson. I am not personally familiar with how Cardone Capital operates but from what I understand you pay a premium to be in one of his deals. 

He also goes after A and A+ deals with relatively low cash flow compared to what a lot of other syndications are pursuing in the C+ B range. His reasoning, I believe, is that it's a more certain exit as they're all institutional quality assets. Just make sure that strategy aligns with yours.

If you want to invest in a syndication rather than going it alone I would at least try and connect with a few other quality sponsors/syndicators and compare their strategy, track record, and deal structures.

This will be my first event as well after unfortunately missing the last one. Looking forward to it!

@Taylor L. it's absolutely the easiest to manipulate. A 100 bps decrease in exit cap can easily translate to a 300 bps increase in IRR.

All a sponsor has to say is "well, that's where the market is today and we don't know the future." Exactly - no one knows what the market is going to be like in 10 years, let alone the next 1-3.

I still think more sponsors should provide a sensitivity analysis table for Exit Cap and Exit NOI that illustrates the range of IRR on a given deal. This way it's easy to look at a worse case scenario to prepare investors for a below average market or performance, but on the flip side you can show the deal in a better case scenario (while avoiding the absolute best).

@Ben Leybovich thanks for the feedback - makes sense.