syndicated deals - who secures the loan?

Question

Let's say one syndicates a deal to purchase a $30m apartment building with 25% down;

Who is going to secure the loan? Obviously, the sponsor isn't going to carry a $30m debt himself and be the only guarantor

Theorically the deal should be structured as a GP or a LP, the property transfered into the LLC, thus the loan should be underwritten under the company's name and therefore all partners should be tied to the loan.

Can anyone explain how the financing should be structured?

Roman M. · Answer

It all depends on the lender and you can ask upfront what guaranty they will require. From my experience dealing with CBS lending and traditional bank:

The sponsor and anyone that owns 20% or more will undergo credit check and will be required to supply personal financial, cash flow statement & resume.

Normally on the deal this size there should not be personal guaranty but it maybe required depending on the lender and since it's only 25% down. With 35% down there should be no personal guaranty (some small banks may still require though).

Majority shareholder and a sponsor will probably have to guaranty in this case but not all the partners that have less then 20%.

Lender will normally require single purpose (preferably newly formed) company (Can be LLC) and the loan should be under New company name but credit underwriting will be on principals of 20% or more in equity and the sponsor.

Don Konipol · Answer

Account Closed, For larger syndicated transactions, the passive investors usually limit their investment to less than 20% so that they don't personally guarantee the loan.

Unless the company acting as sponsor/syndicator is financially strong enough, or unless the LTV is low enough, the sponsor will be required to provide at least a limited guarantee.

This is why many syndicated deals do a 50/50 equity/debt split - enough equity to entice the lender to forego personal guarantees.

We just financed a motel where the 5 passive investors provided personal guarantees for the entire amount of the loan.  Not something I would do if I were on that side of the equation - but that's what we asked for and that's what we got!

Don Konipol · Answer

Account Closed, for a larger type deal, say $30,000,000 + a mezzanine level of what's usually a hybrid of debt/equity is sometimes used.  However, with cap rates as low as they are mezzanine debt has faded out as it's use does not really hike investment returns much on a risk adjusted basis.

So syndicated deals in this environment tend toward value added deals, i.e. property that is currently under preforming with a plan in place by the sponsor to "turn it around".  This also put more scrutiny on the sponsor to show that he has the expertise, experience and capital to actually accomplish this turn around.

The key here is that no investor is going to invest money with a sponsor who lacks experience, a verifiable track record, and some of his own capital in the deal.  It's a process going from point A to the end points.  After getting some experience investing in smaller type deals, the individual investor can perhaps "syndicate" a slightly larger purchase with a few of his contacts as passive investors - and using his track record from his first few solo investments.  Each "syndication" can be a step up - if the last syndication was at least moderately successful.

So, in syndication there are many moving parts.  There is finding and "tying up" the property - seller and their representatives are going to want to see an indication that the buyer has an ability to close.  If leverage is being used, financing commitments must be obtained - again a lending institution wants evidence that the borrower has the ability and resources to carry through till the loan is paid off.  And of course the equity capital, as previously discussed must be raised.

The advent of real estate crowdfunding platforms has made raising capital more efficient, stream lines, faster and less costly.  It has also given investors the opportunity to see more investment opportunities quicker, and provided them with on line access to all the documentation necessary to make a decision. The third party crowdfunding platforms specializing in real estate come in two varieties, the sites that only accept well financed sponsors with long and successful track records and are able to raise funds for most if not all of their offerings; and the platforms that accept anyone who pays a fee to be "listed", and are virtually worthless.

The in between alternative in the crowdfunding world is for the sponsor to set up his own platform to be uses when ever he has an offering.  Although investors will still insist on sponsor vetting, the financial condition of the sponsor as well as the sponsor's record is held to a much more relaxed standard vis a vi the major third party platforms.  The downside is that at a minimum one is looking at $40,000 to set up an in house crowdfunding platform, about $25,000 for the legal and $10,000 - $20,000 for the minimum software.

One other way to work around these issues for the relatively inexperienced would be sponsor is to go to work for, or with an established syndication company.  This has been successful for a few people I know through the years, including the person who came in as my partner 3 years ago, enabling him to use my experience and expertise to gain credibility.  Of course the other side of the equation was that he made a significant monetary and time investment in my business.

David Thompson · Answer

Cedric,

It's also common to bring in a high networth individuals to support the loan (net worth requirements / liquidity) for the GP who should be seeking a non-recourse loan.  If the partners know each other well and trust is there, there is not as much downside risk for this person who is essentially "renting their portfolio" for a GP stake.  Recourse loans do have "bad boy" clauses so its more integrity risk because performance risk is not going to be the concern.  There can be several folks on the GP side not on the loan guarantee.  Limited partners you are correct are limited in risk and are not commonly asked to be on the loan for that reason.  That is an attractive feature for the LP investor.

Ivan Barratt · Answer

Account Closed I may be oversimplifying this but in in short you would have a GP and LP's inside the LLC (technically members and managing member but often in the biz we say GP/LP.  Only the GP is personally liable but in most cases DO make sure no LP's have more ~20% of the invested cash.

There's plenty of programs where you can get the leverage to 75 to 85% percent but you may not have the experience yet to do so. Stay away from bank debt at this time and figure out how to use agency debt.

Best of luck and happy hunting!

Account Closed · Answer

@Don Konipol

Don, thank you very much for the detailled explanation

Yes, i guessed so; rates such as 12%-15% do not make sense in the current market

For a newbie like me, setting up my own investment platform could indeed be a good start in the syndication business. That would also be a good showcase for my completed projects.

Ultimately, the goal is to create a private equity fund, maybe that syndication track record could help me achieve that.

The only problem i expect with setting up a crowdfunding platform to raise debt or equity is that it is subject to the SEC regulation and that you probably need a security attorney to oversee the capitalization process..

Are most of the syndicated deals core plus and value added investments?

I rarely see syndicated opportunistic type investments such as ground up construction, raw land development etc..

Another source of equity i was thinking about could also be presale in the case of land development and condos construction; even though i have no clue how it works in the US but it is widespread and easy to conduct in my home country, France

does anybody has some experience with pre sale condos developments?

Account Closed · Answer

50/50 equity debt would greatly reduce the return of the investment.. but if it is the only way to raise affordable debt without unlimited liability i guess this is the way to go

Beside the loan, is it customary in syndicated deals to raise mezzanine debt to bridge the gap and reach a satisfactory level of return on equity?

Account Closed · Answer

Thanks for the feedback; that structure would look very unattractive to a prospective investor

I would have a hard time marketing an investment if investors are liable beyond their investment on their own assets, especially if they only are limited partners, and if they have to personnaly go through credit underwritting.

I don't see how the loan could be anything else but non recourse and exclusively asset based

The LTV would probably have to be more conservative like 30-35% indeed

Have you yourself sponsored deals where all majority partners went through credit and income verification?

I don't really see what difference it would make to the bank for a deal of that size, especially if the loan is non recourse

Roman M. · Answer

if you want non recourse then it's most likely 35% down.

Every 20% plus partner will most likely required to undergo vetting (financial statement etc).

For $30mln and low rate be prepared to provide lots of info.

syndicated deals - who secures the loan?

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