Seeking Advice for my 1st Multifamily Syndication Deal

[Lanny K.]

Hi BP,

I'm reviewing my first multifamily syndication investment for myself and a few of my investor friends, and want to ensure I properly assess this deal and fully understand the risks.

If you've done a deal like this I'd like to hear from you.  What worked?  What didn't work?  What would you do differently?

Thanks in advance!
Lanny

[Brian Burke]

Originally posted by @Lanny K.:

The property is a B class building complex with just over 100 units 

The collective group of partners includes multiple other General Partners.  

There are two investment options Limited Partner (LP) and General Partner (GP). 

If I'm able to raise enough funds, then I may earn a GP role where I can attend the meetings and add my vote.

All sponsors have skin in the game and our interests are aligned, 

Not sure where the renovation funds come from yet, but that's a great point. 

Lanny I've singled out some excerpts from your post in the quotation above so I can address just these specific topics, hopefully this helps!

As to 100 units--that's a small deal for a syndication.  It can work but operationally the smaller the property the more challenging it is to run.  There's nothing wrong here, I just wanted to point that out because a lot of people would see 100 units as a large property.  But 100 units is more like a minimum in many markets (expensive areas like California excluded).  Less than 100 units are still doable but much more challenging.

The part about there being "multiple other general partners" is concerning.  Too many chiefs can be problematic.  Most experienced groups are pretty well organized with defined roles.  So this statement makes me think that this is a lesser-experienced group that is more haphazardly thrown together by getting all sorts of folks to band together to take down something larger than they are experienced at handling.  I could be totally wrong, but you should try to flush that out.  

Contributing to my haunch is that if you "can raise enough funds you can become part of the GP."  I don't think an experienced group would offer such a program.  And you have to ask yourself if you want to be part of the capital raising effort.  Raising capital is a whole other business (which is why Gene Trowbridge called his book "It's a Whole New Business").  Coming with this new business is the risk of criminal (not just civil) liability if you are out of compliance with the law in the way you approach raising capital.  There is also the risk of you being jointly and severally liable for the actions of your new "partners" if they run afoul of the law.  So if you aim to participate in this way, you should consult competent counsel before taking the plunge.

You "can earn a GP role and add your vote" also means that other people who get tickets to this game can play.  This goes back to my earlier comment about too many chiefs but goes one step further--people with no experience can end up with decision making power and/or voting power on issues in which they are not seasoned.  While it might give you comfort to have a say in things, I'd be more worried about getting out-voted by a group of folks who don't know what they are doing and jeopardizing my investment.  One of the reasons people invest in syndicated offerings is so that a skilled and experienced skipper is at the helm steering the ship.  The structure you are describing nullifies that key feature.

"All sponsors have skin in the game and our interests are aligned".  No, they aren't.  Alignment of interest between an investment sponsor and the investors is like the Loch Ness Monster.  Everybody says they know where to find it but no one has any proof it exists.  Sponsors are in this to make a promote and fees.  The only alignment here is that their ability to be successful in this business long-term is dependent on their track record.  If they perform well for their investors, their investors will re-invest and tell friends.  If they don't treat their investors well, don't report well, or don't perform well, their investors will invest elsewhere and not give any referrals.  That's the alignment--not the small amount of money they might lose if the deal goes sideways.  But watch out for one-and-done-rs.  These are the syndicators that really have nothing to lose because this is their first deal and their reputation isn't even built enough for it to be at stake.

As to the rehab funds--one of the most common problems I see in syndications is sponsors don't raise enough money. So be sure to find out where the rehab funds are coming from. "From cash flow" is a really bad answer. There are two reasons why sponsors don't raise enough money. One is because they don't know how much they need and they just mis-estimate. The other is because they are trying to manipulate the returns by raising less money (meaning higher IRR for a given amount of cash flow). Either reason isn't a good one so just be sure you dig in deeply to make sure that the venture doesn't fall short on cash. The two biggest risks for failure are too much leverage and not enough cash.

Well, in today's market I'd say the other big risk is inexperience.  Any freshly licensed pilot can fly a simple airplane in clear weather.  But only experienced pilots with advanced training and ratings are allowed to fly complex aircraft in bad weather.  That same standard should apply here because today's market is anything but simple and there are clouds forming on the horizon...