What does a typical multi-family synidcation structure look like?

Question

• Is a preferred equity structure optimal for these types of deals and if so what % interest as well as how much equity do you give up to your Limited Partners?
• What is the threshold in terms of $ amount for a property to be characterized as a commercial property from a lenders perspective?  
• Is it possible to obtain a construction loan in order to rehab the units if you are not buying the property outright for cash?  ie; 20-25% downpayment
• I'm located in the Northeast (NY/NJ) and would love to hear about up and coming areas within these two states or maybe in surrounding states like PA/CT, that are gentrifying, where the cap rates still make sense from a cashflow perspective. 
• If anyone can recommend a good real estate attorney with experience in structuring these types of deals in NY/NJ it would be much appreciated.

Hi All - I have experience buying and operating individual rental properties but am now attempting to figure out the mechanics of how I can syndicate a larger multi-family deal.  I have a few questions that are listed below.

• Is a preferred equity structure optimal for these types of deals and if so what % interest as well as how much equity do you give up to your Limited Partners?
• What is the threshold in terms of $ amount for a property to be characterized as a commercial property from a lenders perspective?  
• Is it possible to obtain a construction loan in order to rehab the units if you are not buying the property outright for cash?  ie; 20-25% downpayment
• I'm located in the Northeast (NY/NJ) and would love to hear about up and coming areas within these two states or maybe in surrounding states like PA/CT, that are gentrifying, where the cap rates still make sense from a cashflow perspective. 
• If anyone can recommend a good real estate attorney with experience in structuring these types of deals in NY/NJ it would be much appreciated.

Thanks,

Mike Elfant

Scott Meitus · Answer

Mike,

Each syndication is usually somewhat unique to the individual syndicator.  That said, I can answer based upon my experiences.

1.  I have always used a preferred equity structure with a "general partner/limited partner" arrangement.  LP's received an annual preferred return (percentage rate varied depending on current interest rate environment) of between 6% and 10%.  Above that, proceeds were divided between the GP and the LP's.  My typical structure was  between 50/50 (for small deals) up to 25/75 for larger ones.

2.  My experience is that a lender will view your transaction as "commercial" as long as the asset is not being wholly purchased for personal use/living.  As such, even a single family home can be treated as commercial provided you do not plan to live there.  Your local lenders may have a different viewpoint, but that is what I have encountered.

3.  Having a separate construction loan is not unusual.  However, most lenders will require you to refinance after renovations are completed, and the two loans can be wrapped into one permanent loan.

4/5.  Can't speak intelligently about your area, as I am unfamiliar.

Hope this helps.

John Caruso III · Answer

Hi Mike,

I'm a North Jersey native and have grown up here all my life. Feel free to reach out and pick my brain on up and coming areas.

John

Marc C. · Answer

One way to learn how others are do it is to grab some deals from the crowdfund sites. I regularly read the deals, PPMs, LLC agreements and subscription agreements from the listings on www.crowdstreet.com. It's helped me to really learn how most operators work. Most of the deals are very similar; paying a 8% preferred return, followed by a profit/equity split of some kind. (The terms seem very "sponsor-friendly" in a lot of cases.) Goal seems to be an IRR of 20% so you can tell folks they could double their money in 5 years or so.

Dan Genzel · Answer

All depends on the type of deal value add vs. stabilized and ROI as compared to what you can offer for preferred return and splits.  You don't want to get behind on paying the pref.  You live for the backend so make sure it's there and it's well worth your time.

Find 25 people with $10k each and your off to the races.  It's just following the process from there and knowing how to put the capital stack together.  Of my 30 syndications not one of them was similar.  You want to talk more about it PM me.

Michael Elfant · Answer

Thx for the amazing advice @Benjamin Lapidus.

Benjamin Lapidus · Answer

Hey Michael,

I grew up in Morristown and lived in the city for 5 years.  Here are my thoughts:

1. No one structure is "optimal".  Offering preferred vs not may depend on if you're taking a management fee or not, if you're taking a deal fee or not, if you're taking an additional equity stake without cash contribution or not, if you're over collateralized or not.  I did a preferred return of 8% with 50/50 split on top for my first deal, a fixed return of 8.5% with nominal upside on top for my second, and a super simple equity ownership no preference set up on my third.

2. This will vary.  I bought a $102K SFR with no investors, and the regional bank I worked with considered it a commercial loan because I was doing a cash out ReFi with only 2 months seasoning on title.  I could have gotten a Fannie/Freddie loan on that same house that would have been considered residential.  The line between residential and commercial for many banks is not often defined by $ amount, but by circumstances.

3. Absolutely!  But if you're going to stick within the federally-regulated lending market your options are going to be very few, and usually unattractive.  I work with a bank in Chicago that gives me 90% of purchase and rehab costs for up to 12 months in 49 states.  If I flip, 12 months is more than enough time.  If I want to hold as a rental, than after 6 months I can do a cash out ReFi (commonly referred to as the Buy Rehab Rent Refinance {BRRR}) strategy and cash them out.  The interest rates are much higher for those 6 months, but the accessibility to cash is worth.  There's a lender in CO that does 100+% loans on purchase/rehab/soft costs, but they're only in 4 states.  Point is, is that hard money is not hard to find these days to accomplish your goals.  PM if you want that Chicago Bank.

4. I never invested in NYC/NJ because NJ taxes and NYC negative cash flow, but the one place that did catch my eye was Weehawken, NJ.  Still cheap (at least 2 years ago) and can cash flow, basically an extension of Hoboken, protected from a massive market correction since NYC/HBK wasn't hit at all in 2008.

5. I've never worked with him on a deal, but I appreciated Richard Kilstein's level of intelligence and availability.

Also if you're looking into syndication, I'd check out @Joe Fairless Best Real Estate Investing Advice Ever Podcast.  He's a master syndicator.  And you won't want to miss the Best Ever Conference in Denver next month, which will dive into so many of these topics and more.

Cheers,

Ben

Michael Elfant · Answer

Thx @Scott Meitus helpful.

What does a typical multi-family synidcation structure look like?

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