Syndication and Investor Repayment

[Kyle Burkhardt]

Hi Everyone!  My business partner and I are considering the idea of gathering money from investors (friends) to purchase a 12-24 unit apartment complex.  We aren't entirely sure how to go about structuring a contract for the investors that would explicitly lay out how much they'll be paid, if they'll own equity in the complex forever, how expenses work, etc.  Would anyone be willing to offer their insight into how best to approach this idea?  Would greatly appreciate any and all questions, comments and feedback.  Thank you all so much!!

[Omar Khan]

@Kyle Burkhardt Syndication offerings are private securities offerings. Hence, they are governed by SEC. Starting off you will need to hire a securities attorney to get your house in order. This is an important step and you should take the compliance aspect seriously. 

At the 12-24 unit mark, syndication might not be the most cost effective way of structuring the deal. This is because there is not enough meat on the bone i.e. your legal/compliance costs will eat into your profits. This is also why you will see syndicators focusing on deals > 50 units, at a minimum. It doesn't mean that people don't do deals below 50 units, just that it won't be the best bang for your buck. You can look to structure your deal as a JV or partnership.

I am assuming you have a basic understanding of finance (your profile states you work in it). How the deal operates is dependent: 

• financial structure
• financial projections

The above will govern revenue/expense/profit splits. 

Underwriting can be easy or difficult depending on the complexity of your deal. Major modeling issues:

• waterfalls (GP/LP splits), 
• asset drivers - revenue mix, rent roll, expense ratios -, and 
• financing details can make

Most, if not all, multifamily models are simple cash flow models based off T3/T6/T12 financials. You layer on your own assumptions (operational, financial, etc) and project 3-5 years. The modeling isn't terribly hard. Any first year analyst at an investment bank or asset management shop should be able to learn it in less than a few hours.

In fact, I teach people - multifamily and used to do it in banking/M&A - and multifamily modeling is not as hard as LBOs and other models used in institutional shops. The value add is in the assumptions which you gain with experience. 

Most commercial real estate is valued using the income approach but investors also use the sales comps and replacement methods (among other methods) to triangulate their answer. I would suggest using industry database, if you can get your hands on industry databases - CoStar, Yardi, REIS, Axios. You can also use publications from major brokerages - M&M, CBRE, JLL - to get local data. Your broker should also be able to provide you this data. 

If you have a background in finance, you should be able to quickly understand the modeling parts. PM me if you need any help.