Upfront Costs of Syndicating Multifamily??

Question

Good Morning!

Control your morning and you control the day! I would just like to start a discussion on what the upfront costs are in investing in multifamily real estate. I am a knowledgable investor but not experienced so I understand I do not know every single cost that will be associated.

Are there any costs that experienced investors know about that would be good to share?

I understand the earnest money for acquiring properties, the cost of creating proper SEC documentation for syndication guidelines, what else?

-Nick

Theo Hicks · Answer

Lender/due diligence fees

• Appraisal: $2,000 to $10,000
• Property Condition Assessment: $50 to $250 per unit
• Phase 1 Environments: $2,000
• Unit Walk Inspection: $25 per unit
• Lease Audit: $25 per unit
• Property Survey: $5,000
• Earnest Deposit: 1% to 2% of purchase price
• Lender application deposit: $25,000
• Lender rate lock deposit: 2% of loan balance (only applies to agency debt)

Legal fees (assuming it is an apartment syndication)

• Operating agreements: $350 to $15,000
• Private placement memorandum: $5,000 to $15,000
• Subscription agreement: $350 to $5000
• LLC Formation: $200 to $2000
• Having your attorney negotiate the loan documents: $10,000

The costs are general guidelines and will vary depending on the size of the deal and how complicated the GP/LP partnership is.

Don Konipol · Answer

@Nick Morris “ Can we use raised capital to cover all of these costs? “

If you choose to use the general exemption from securities registration, either traditional or the SEC Reg D safe harbor, it’s pretty much wide open as long as you disclose.  But passive investors have more product then ever to choose from, with much easier access to information online.

When investors are assured that every penny of their investment is going into the investment itself, the sponsor is paying, without reimbursement for the legal fees for formation, due diligence costs, inspection, etc., and the sponsor has his own money in the deal, then you haven’t the greatest shot of raising the capital needed.  As you get further away from this ideal, a successful capital raise gets harder, and the deal has to have bigger, more likely upside with less risk to make up for the structuring deficiency.

Spending six months putting a deal together while getting a few friends and relatives to invest with you is actually a pretty simple task, especially for a deal under $1 million.  Putting together 12 deals a year with an average size of $3 - $5 million with investors whom you never met is a completely different story.

So here’s the thing.  When you recruit a couple of friends or relatives to invest in a property with you it’s not really a syndication, it’s more of joint venture or partnership.  Nothing wrong with that, it’s probably a good way to start.  But getting into syndication, even small time is going to cost you money.  People who aren’t friends won’t invest unless you comply with Reg D, have a professional PPM, professional website, crowdfunding site where they can access deal documents and literature, a verifiable tract record, and your own money in the deal.  Despite what the gurus selling books and classes say, this is the reality.  The advise to just use other people’s money (OPM) has been put forth by gurus and authors since I first became involved in real estate in 1976.  But the people most likey to  be able to successfully obtain OPM are those that have experience, expertise, and their own capital.

Sam Grooms · Answer

The typical large up-front costs that the sponsor will need to cover are:

Earnest Money Deposit

SEC Attorney Fees

Lender Deposit

Most of the other fees are paid at closing, but you could have various other costs, like due diligence fees, LLC formations, good standing certificates, bank account deposit (to open bank accounts), etc. If you're purchasing rate caps, you'll need a Bloomberg LEI. If you're using an investor portal, there's another cost. Your closing attorney should be willing to delay their fees until closing, but not all will do that.

Note that a lot of the other expenses/fees can be delayed until closing, but you'll still be on the hook for them if you don't close.

Taylor L. · Answer

One tried and true method of getting in is to raise capital for others' deals. Many folks have gotten their start by doing so. If your mentor will let you do that, there's an option. Talk to a lawyer, it's something to consider.

Nick Love · Answer

@Don Konipol

Thank you for your expertise. I understand that it is much more difficult to raise capital without experience or personal capital, but I do have a mentor where I can leverage his expereince in apartment investing.

Oleg Shalumov · Answer

@Nick Morris

Above is the good list provided by @Sam Grooms and @Lennon Lee.

I would also suggest having some money in Repair Escrows, and some lender also require you to have money in reserve (for 6 months)  for Real Estate Taxes, and Insurance.

These expenses should be part of purchase and raised capital should be used for these expenses.

Nick Love · Answer

Can we use raised capital to cover all of these costs?

Nick Love · Answer

Yes I understand that some companies offer a product that will take care of certain fees and such. Do you know a company that has a SEC attorney that will create the PPM and other necessary documents to raise capital at a reasonable price if not free?

James G. · Answer

All of the above costs will come about, but keep in mind that some companies offer a product that will take care of these fees for you. If you do decide to pay out of pocket, it will become very worth it in the long run as you will receive acquisition fee, disposition fee, asset management fee, etc. Hope this helps!

Seth Ferguson · Answer

Hi @Nick Morris,

@Sam Grooms and @Lennon Lee pretty much got it. Throw in some money for dinners with your investors.

What size of property are you targeting?

Upfront Costs of Syndicating Multifamily??

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