63 Unit Syndication & Scaling

[Ryan Prichard]

BP Fam, please overwhelm me with your inputs. I'm looking to use my SOI, our 100+ agents in the office, lender network, and their connections to fundraise an upcoming purchase. 

Our team is fundraising either a full $4.8 million for a 63 unit purchase or fundraising a 25% down payment to work with our capital lender. I'm working with my attorney and CPA to draft our operating agreement and payment structure. We want the BP Fam input on your experience when you scaled to this level. 

(1) What do you wish you had added to your syndication partnerships? I've primarily focused on portfolio purchases of 1-4 units and paid out monthly with property management. 

(2) How have you split earnings per investor for different % of ownership? 

(3) What reserve would you recommend?

(4) Recommended software for bookkeeping 

(5) How have you managed purchases? Do owners have voting rights or does the operating manager get a full say? 

(6) Other experience, please post for input/ contributions. 

Fun notes about our purchase:

The property is currently mixed with student housing and long-term tenants. The value add is converting the buildings using per-bed leases to all long-term tenants. There is room to increase rent between $110-$250 depending on the unit. The current net monthly cash flow is $9,679 and aims to be $22,956. In this area, it should add nearly $1,500,000 in equity.

All units are fully renovated and fully furnished. We have a lender that can give us a 12-month interest-only bridge loan. After that, it can be converted to a 30 year fixed rate option. 

During school, season occupancy is nearly 96% and plummets into 80%'s in the summer season. Our research shows it's a pipeline issue with management and not necessary as there are renters available to take full-year leases.

[Jonathan Twombly]

So the first thing not to do is get sideways with the SEC.  If you are doing a syndication, you are selling a security, and in that case only you as the issuer and licensed broker-dealers may legally sell the securities (i.e., the shares in your deal).

Now, there are some exceptions to this default rule. Any person who is a member of the partnership (the issuer) may sell the securities. However, to be compensated, every person must have some role in the partnership that extends beyond simply raising money, like some operational responsibility, putting earnest money at risk in the deal, signing on the debt, etc.  If their role is simply raising money, and they are not a licensed broker-dealer, they are illegally selling a security without a license.

It's really critical that you do this right, so be sure that you have hired a securities lawyer to structure this for you, and not a regular partnership lawyer.  Your lawyer must know how to legally structure a syndication deal so that you do not run afoul of the SEC.  The penalties include things like having to return your investors' money (which you might not be able to do without selling the property) and being barred from doing syndications in the future.