How Would You Pitch This Deal?

Question

So I've got a line on a peach of a multifamily deal, and I'm looking for advice on how to structure a deal so it's attractive to investors. I've had a couple of investors tell me the terms I started out with are attractive and should draw interest, and I've had one guy basically call me batsh*t crazy and tell me I might as well be looking for Santa Claus.

Here's a rundown of the deal:

Asking price $2.6M
Gross Rents $345k
Expenses $76k
NOI $269k

I've tried a couple of things so far, with no luck:

Local commercial lender, 80% LTV 3.5% @ 20 years, seller finance 20% @ 6% for 30 years with a 5th-year balloon. Seller couldn't carry that much of the debt.
Seller's preferred lender, 90% LTV 5% @ 30 years, 10% cash down from local investor. Lender couldn't make loan because I don't have a track record in REI.
Local commercial lender, 80% LTV 3.5% @ 20 years, 20% cash down via home equity loan on my personal residence + investor cash contribution. Lender wanted additional stated income and more guarantors. Investor went directly to seller behind my back. Seller shut him down.
Advertised on BP for passive investment partner to put up 20% cash and serve as guarantor, in exchange for 25% of equity over 5 years plus return of 100% of investment at refinance/resale. Had one investor respond that I needed to bump the equity share to 50% over five years and also include 50% of equity at resale/refi, after initial investment was returned.
At suggestion of another investor, advertised on BP for JV partner to put up 100% of purchase price in exchange for 50% of net profits, 100% return of investment at refi/resale, and 50% equity split at refi/resale.

That last one is how my current offering reads. Return projections look like this:

Year 1 distribution $135k each (to investor & manager)
Year 2 distribution $140k each
Year 3 distribution $146k each
Year 4 distribution $153k each
Year 5 distribution $159k each
Total cumulative distribution $733k each
Estimated equity at refi/resale $690k each
Total distributions $1.423M each

Again, I've had a couple of investors tell me those terms are attractive and should garner some interest...but I've also been told there's no way in hell, I don't bring anything to the table, I don't have the experience, etc.

So, my questions to the gallery are, A) do I have any chance of getting this deal done at all, and 2) if so, under what terms would it be attractive to potential investors? Should I let the current offer cook a little longer and see if I get any bites? Should I sweeten the deal a little? Or should I give up on it and move on to something a little easier to get done?

Bryan Hancock · Answer

This looks like a 6 cap project at best given the information you provided. There is not enough room in the project to syndicate it. If the vintage is older it is likely under a 6 cap. BMC Capital in Dallas is a good source of commercial loans, but you're unlikely to get any lender interested without experience on your resume with projects of the size you're seeking. I suggest you try to find a local syndicator that has the experience you need and partner with them somehow on your first project.

Joel Owens · Answer

Andrew I second Bryan Hancock.Sellers typically sell pro-forma numbers. How they do this is underestimate expenses, self manage the property, etc.Typically a property showing low operational expenses has hidden problems with deferred maintenance.If you take for example the expenses of 76,000 and divide by the gross expected rents 345,000 that you have verified to be real with no rent credits or above market rents for taking on questionable tenants you get seller stated 22% all in costs for the complex.So 76,000 / 345,000 = 22%Most older buildings for eviction, maintenance, management, etc. you use 50% of gross expected rents. If landlord pays utility like water or gas it is 55 to 60% on older buildings.If we take 345,000 gross rents times .45 ( 55% costs ) we get 155,250 NOI. 155,250 NOI / 2,600,000 price = 5.97 cap rateThat is where the 6 cap is coming from. If as a syndicator you do not know how to evaluate an asset class conservatively you are putting your partners capital or passive investors money at extreme risk.The chance of failure is high when an asset is not properly evaluated and the sponsor has very little experience or track record.This is probably why you are getting push back to not do this deal.No legal advice given.

Joel Owens · Answer

Buildings are only about 6 years old according to you. Years 1-6 of ownership on a brand new asset look very different than years 7-14. Those years things start to get older and go out or need more constant repairs.The seller could have a special property management rate if that company handles a bunch of properties for them.If you pay water even with no leaks many utility companies didn't raise rates the last 4 years because of the slump in the economy. Now that things are looking better they are raising rates in some areas.Check property taxes. If it has slightly gone up the last 5 years then it hasn't been re-assessed in what the county or city sees as an up market.You have to plan for these things when you own the asset for your hold time. You can't go by the sellers numbers. You look at those numbers and you challenge them versus your experience and market conditions. It's all about the multiple little things that can add up to big things that affect the cash flow.If a seller has substantial equity in the property and they do not want to hold a second that can often times be very telling that they want to wash their hands of the property. If the property is so great the seller generally has no issue staying attached to the property in some way for a short period of time.

John Casmon · Answer

@Andrew Taylor Couple of concerns. Even if the numbers are actuals and not pro forma, you still need to plan for higher expenses for the reasons that others have mentioned. Also, your investor distributions don't account for the loan payments (just select a realistic loan rate and term for projections). You have $135k each to investor and manager in year 1, but the NOI is only $269K. You're missing the loan payments so all of your distribution figures are off.Finally, I'd suggest clearly highlighting what makes this a "line of a peach" of a deal. Doesn't sound like this is a reposition deal, so where's the value being created? How long is the contract with the university? What's the upside with the property? Are there comps that suggest this is a deal?

Brian Adams · Answer

@Andrew Taylor, how many units is this deal? (just give me, under 100 units or 100+ units)You mention how you are underwriting this asset and the numbers are on actual property taxes. In your numbers did you adjust for higher taxes for the new appraised value once you acquire the deal?Also you say no cap ex. Even a 6 year old property has something wrong with it, so make sure you budget for it so you aren't surprised later.

Curtis Bidwell · Answer

@Andrew Taylor My recommendation is that you put together a personal profile of your property experience. Include everything of relevant value. Your construction experience adds value as to knowing the value of property, knowing cost estimates for repair/maintenance/capital improvements, etc.. Next, go talk to some property managers. Choose one to represent you. Depending on the size of the project they will charge 4-10% of gross rents. Negotiate with them.Go back to sellers preferred lender and lay out your personal financials, 2 years tax returns, property experience and value to the project, business plan -including professional management co, partnership arrangements, specifics of the property in question: current income/expenses and income/expenses you anticipate after taking control, etc.. Put all of this in writing then go to Office Depot and put it in a binder and hand deliver it to the VP of commercial lending. Talk him/her through it, get to know them and develop a rapport. If they still won't do business, take your binder to other small, local, business banks. If the deal is good, one of them will do it.

Ben Leybovich · Answer

@Andrew TaylorThose numbers smell very pro-forma. There is just simply not a chance that OpEx on a Gross of $345,000 is only $76,000. And if I think so, the lenders will think so, and there's your problem. If you double the OpEx and throw in some CapEx, you might start to approach reality, and that may make it a 6.5 Cap. But that's the rosiest picture...

Brent Coombs · Answer

@Andrew Taylor, you LOOK like Santa Clause, but you need to sweeten that deal!If you advertise for a JV partner to front 100% PP, your take should only be a bird-dog fee!(Of course, how large that fee should be depends on your negotiating skills). [Not legal advice]...

Andrew Taylor · Answer

Thanks for the analysis.The only flaw I see is that none of those numbers are pro forma. Those are the actual numbers. Actual property taxes, actual insurance as quoted by my agent, actual management fees, 10% held back for repairs and maintenance. There are no capital expenditures required as the buildings are only about six years old. Oh, and the rents are guaranteed by the University. They have signed an agreement to purchase 100% of the leases for the upcoming school year. Does that change your analysis any?

Andrew Taylor · Answer

@Bryan Hancock, thanks for your input. Would you mind telling me how you came up with the 6 cap figure? When I analyze the deal I come up with something significantly different. I'm curious about what I'm missing (or doing wrong).