Multi-family cashout refinance (Houston, TX)

[Kat N.]

Hello all, I am reviewing a syndication opportunity where the sponsor strategy is to improve the operations & rent of the current apartment, and cashout refinance in year 3. 

1. The sponsor assumption is to cash out refinance with 30 year loan in year 3, at 4% interest at 75% LTV. I am not familiar with commercial loan. Can someone advise me if this assumption is inline with the market?

2. The current NOI = $111K, and the sponsor is buying at the price $6.5M, so the cap rate is really just about 1.7% ?!?. The sponsor said there are some improvement can be done, and a lot of costs can be reduced, thus, the sponsor is looking to increase NOI to $475K, and cap rate at 6%, thus the value after improvement = $7.9M. (Note this is class C building in Houston, in which cap rate is 6% typically). I am concerned of the acquisition cap rate. Is that typical?

Thanks so much for all insights and advice, 

Kathy

[Cody L.]

Originally posted by @Tushar P.:

@Cody L. that’s a great return! How long was the hold period? You may be making it look very easy - there must have been a lot of effort during the hold period to improve the value, and many hurdles/challenges to overcome. Or was it mostly generic stuff like upgrade the standard things and increase rent with inflation?

As for sponsors making money from the fees itself, I totally agree. As a co-GP, I will get my money back just from fees during the hold period. And if the exit is compromised, LPs will take the hit mostly. That’s why my first criteria when looking at a deal as an LP is the GP’s skin in the game - they make more money than the LPs when the deal works, but they should also lose more money when the deal goes south.

Yeah. there was a lot of work.  For the first several months I was there every day, kicking in doors, running off drug dealers.  I'd drive by on my electric skateboard and spray wasp spray on the dealers as they'd try to chase me.     But, it's what I do.  I did it, it's done.  The property is nice.  And that's that.

While I've owned it several years at this point I've also refinanced it quite a few times.  My first refi was about a year and a half after I bought it.  new loan was $2m.  My all in after capex was about $1.25m.   So after the first refi I owned it with $0 out of pocket and $750k in my hand.  Since then each new refi just gave me more cash to grow my business.