Investing in Multi-Family Syndications With An Out Of State Sponsors

[Stuart Udis]

Like many of you, I am frequently contacted by syndicators raising capital for apartment building acquisitions in distant markets. In many instances I am notified an offer was made in a multiple offer situation with an acceptance date expected in XYZ days. The syndicator proactively notifies their capital relationships to take inventory of what equity could be available for deployment in the event the contract is awarded. I am sure this sounds familiar. I struggle to understand why these opportunities are good investments. Here’s my reasoning before even spending any time reviewing the syndicators track record or credentials. I would like to hear others take as well.

To start, these are the fundamental underwriting inputs the GP/Syndicator will be making when arriving at their offer price:

1. Management Fees: This will be very similar to any other bidder who relies on 3rd party management (and generally more expensive than a local operator who benefits from the efficiency of managing an existing local portfolio).
2. Operating Expenses (other than management fees): Estimated operating expenses can deviate significantly from one bidder to the next.
3. Cap Ex Costs: Estimated improvement costs can deviate significantly from one bidder to the next.
4. Rent Growth: Estimated rent growth can deviate significantly from one bidder to the next.
5. Cost of Debt: If debt can be assumed and is cheaper than the current market, most bidders will share same input. If new debt has to be originated, debt is largely commoditized and there will be limited deviation in pricing from one Bidder’s assumption to the next.
6. Cost of Equity/Capital Stack Structure: GP contribution vs. LP contribution, Fees, structure, preferred return etc. get bundled up into how the capital stack is designed and the cost of equity will deviate from one syndicator’s projections to the next.

*I understand terms such as deposit amount, contingencies and settlement period can play into the decision making of the Seller, but a syndicator who is relying on outside equity is likely performing full diligence and is not shortening their contract period materially from others in pursuit of the deal.

To summarize, if you are approached by a syndicator raising money for a multi-family building that meets this multiple offer fact pattern (as is usually the case) who is awarded the contact, they more than likely assumed the most ambitious rent growth, most understated cap ex costs or operating expenses or lastly the cost of equity (your return) is projected to be less than the LP’s the other bidders relied upon. All other inputs are largely going to be the same from one bidder to the next. Why would I want to be an LP in a deal where the GP is either arriving at the best-case scenarios of all bidders or I am considered cheaper LP equity than the LP’s in the competing offers? How about you?