Structuring a multifamily deal

[David Peters]

I am trying to understand how to put together a deal on a 100+ unit apartment complex.  I am looking at being a lead investor and bringing in passive investors as well as using bank financing.

I own a property management company and this company would manage the property.

The lender is willing to provide 85% financing and I need to bring in 15% down.

I am looking at doing this by selling a few single family rentals and using a 1031 exchange to bring my portion of the down payment.  I will also need to raise the balance of the down payment from passive investors.

Can anyone tell me how I would go about structuring such a deal?  I am in Minneapolis, MN.  

Any advice would be greatly appreciated.  I have not found much information on specifics of how to go about doing this in the forums.

[Brian Burke]

@Steve Olafson is right on.  The preferred return and waterfall hurdles can slide around, there is no "industry standard" so it is up to you to determine what the pref and splits should be to attract capital.  Capital is a function of supply and demand just like anything else.  If you have a lot of people wishing to contribute money to your venture, you can have terms that tilt more in your favor.  On the other hand, if you don't have any capital lined up and you have to recruit investors, you'll have to sweeten the pot or they won't play.  Your track record plays a role, too.  If this is your first syndication, it's harder and the terms won't be as favorable to you vs. this being your 10th one and you have hundreds of units and documented prior performance.

Your first step is to find an attorney that specializes in real estate syndications.  The securities laws are not something to take lightly so you'll want experienced counsel on your side.  This will cost you, plan for $10K to $20K for your first one (and yes, these costs are deal-level costs that are part of the expenses that you are raising capital for so you can get this back from the proceeds). 

Don't make the mistake that most first-time syndicators make.  What is that, you ask?  Let's say that the building is $1 million and the bank says they'll finance 85% (as you say...that seems high to me but that's beside the point for the purposes of this discussion).  This means that you need to raise the 15% down, or $150,000.  WRONG!  You'll need to raise much more than that because you'll have to cover closing costs, syndication costs (remember the attorneys we talked about), any needed renovation or deferred maintenance that needs to be corrected, the first year's insurance will have to be pre-paid, utility companies will require a deposit (and for 100 units it's not a small deposit), the lender's tax and insurance escrow will have to be funded with a couple of months cushion, and you'll need capital reserves so cash flow isn't too tight.  Don't get caught under-capitalized and you'll be fine.  Don't raise enough money and this first syndication could likely be your last.

Good luck!