Syndicate a property already in my portfolio?

Question

I have no idea if my title makes sense or is even possible, but I'm wondering if anyone has ever purchased a property and once stabilized, raised money to pay off the mortgage.  I currently have a multi-family property and I'm not sure I'm ready to raise money to syndicate a new property, of which I have no real experience, but I think I could very easily determine and sell others on the property that I currently have since I already know all the numbers now that it's stabilized.  I recognize it's syndication in a completely different way, but conceptually it seems possible, logical, and legal... I think :/.  I would raise funds to pay off the mortgage and then use those funds to provide a return to myself and other investors.  I'm not sure I would sell it to a new llc or not, but if I did, I could even take the funds from the sale and purchase another property with a mortgage.  Does this make sense?  Has anyone ever done this?  Can you see some pitfalls in my logic?  Thanks for any and all perspectives!

Brian Burke · Answer

Portfolio properties are syndicated all the time, it’s called a recapitalization. New investors come in and take out old investors, so the old investors can realize their profits and invest in another deal.

Here’s a typical scenario: a syndication sponsor buys a value-add property and gets funding from investors, with an intended 3-year hold.  Because the sponsor can fix up the property and drive income, they can likely produce a 14% to 16% IRR, but initially a fairly low cash on cash return, say 4-6%.  This works well for investors looking for growth because of the high IRR, and they aren’t too bothered by the low cash-on-cash.

After the property is fixed up and the income is pushed, the sponsor sells, and everyone gets paid.  That’s the end of the deal.

But in a recap scenario, instead of selling the property, it is “sold” to a new syndicate where the same sponsor remains.  New investors who are in for the long-haul and aren’t worried about IRR, but instead just want steady cash-on-cash returns, fund the new syndicate.  They might be looking for a 10%-12% IRR and 8% cash on cash, for example.

The early investors are happy—they got their return.  The new investors are happy, they get steady cash flow with less risk than a value-add deal.  The sponsor is happy, they got their promote and get to stay in the deal to earn a second promote in the future.  This could certainly be done on a property that you own personally—instead of taking out old investors, you are just taking out one investor—you.

The problem I see with your plan is you are considering raising money to take out the mortgage lender, not investors and not your equity. I can’t imagine any reason why you would ever want to do this. Debt is the cheapest money you can get—you are essentially saying that you want to remove someone that is willing to give you money at 4% interest (your lender) and replace them with someone wanting 10% to 14% (investors). I don’t see how that gives you any benefit whatsoever.

Ronan Donnelly · Answer

Hi @Jon Hinkle, here are some thoughts:

1) Raising money post stabilization - you would have to target investors who are interested in cashflow assuming that post stabilization there isn’t a ton of equity upside. Those type of investors would almost certainly want a higher return than you would pay on a mortgage so it doesn’t make sense for you

2) If you have stabilized the property and improved the NOI you could do a cash out refi to get most of your capital back but you would still maintain a cash flowing asset. You could then use the cash out refi to fund the down payment on another commercial asset.

3) If you think you would rather sell the original property, at a higher valuation you could always 1031 into a larger asset and do a rinse and repeat of what you did originally

4) From an investor perspective I think it would be challenging to find private investors that would be willing to fund a cash out refi at a rate that is lower then you already have, if at all.

Good luck!

Roni E. · Answer

As Brian said you focus would be to take out the equity partners and leave the debt. This way the investors are just coupon clipping every month just a check in the mail.

Jon Hinkle · Answer

Ah, right... I see what both of you are saying.  Thank you both so much for taking the time to respond with so much detail.

I was trying to think of a way to get money out and purchase an additional property.  I'm not ready to sell but a cash out refi makes sense, in time.

Can I do what Brian detailed in the recap option if I have a mortgage?  The investors would essentially purchase my equity and come on as  LPs.  Would an investor find this confusing/nonsensical/downright stupid?  I would no longer have any money in the deal but would remain the GP... It gives me the ability to purchase another property while continuing to manage this current one.  Obviously a pretty good deal for me, but it's unclear to me how investors would respond.

Thanks again!  I really appreciate you taking the time to respond.

Syndicate a property already in my portfolio?

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