Syndication how to attract loan sponsor

[Hassan O.]

I have completed 15+ single family fix and flips, rentals and wholesales over the past few years, using a variety of funding methods and I want to get into the large multi family space. My favorite method is buying subject to, where I basically find a distressed owner with a decent property needing repairs and with equity, and has a mortgage on it that is a couple of payments and we create a deal where that loan stays in place in the sellers name so I don’t have to jump thru the hoops of getting a mortgage in my name from a bank and I get title, which I place in a land trust. I then use the funds of a private lender or partner to help me close it out, catch up on arrearages and cover the costs of repairs, marketing and holding until it’s sold to a third party.

I am very comfortable with this process in the single family space and see the similarities to syndication in the multi family space. I am comfortable raising the equity capital and with the idea of bringing on a loan sponsor. The loan sponsor being an individual or two that have large multi family loan and operational experience that I don’t have at the moment, plus the net worth required to qualify for the loan.

So let’s say that I did all the research on several cities and that I found an class b- 80 unit apartment complex in Texas that thru improvements we can increase the value significantly in a reasonable amount of time and can purchase at $10MM. Let’s also say that I can raise  equity thru personal and business contacts 32% of the $10MM purchase price $3.2MM.

Let’s say that the deal pencils out and the upside value is clearly there via increased rents and reduced expenses via better management, how can I best attract quality qualified loan sponsors and keep a stake in the deal? The sponsor qualifies for the $6.8MM loan and of course gets his or her share of the pie and I participate in the entire business plan from attracting the deal to closing, thru the repositioning and operations to final resale. 

I know I need to identify these individuals prior to locating opportunities, I don’t have the experience or net worth required for the loan on a project of that size, but do have years of experience raising capital for single family deals. I understand that there are assumable loans out there but the lack of experience on my part would be a major hinderance. How to best package the opportunity for potential loan sponsors?

[Rick Martin]

@Hassan O. Someone who is contributing their net will normally retain in the neighborhood of 10% of the GP. They will have to have a net worth that is at least equal to the loan amount. You'll need 10% of the loan amount in liquidity. This might be the same person, and they get anywhere from 7.5%-10% of the GP, so potentially there is 17% to 20% (give or take) right there in equity you can assume you'll need to offer this person. Loan experience is another big one. This varies widely (from 5%-30%) but if it is packaged with the same person, you can save there. Then, there is EMD/risk capital (3%-15%). If you do both the asset mgt (25%) and the raise(25%), you can command as much as 50% of the GP, but not having the multifamily syndication experience will reduce this percentage. You need an experienced sponsor on board. The asset manager could be this individual.

Beyond that, you will need a polished deal deck with an in-depth market and rent study, proforma, and business plan. If you offer the right equity and provide a thorough deal deck (investment summary), you should be able to attract the right person/people. Experience in numerous areas is key. Just be prepared to compensate with equity.