Concept - a way to get a lot of ownership in deal WO more equity

[Sean Wilkinson]

This is my first forum post here so hello everyone! I just wanted to get some feedback on a Strategy I have been thinking about for either 1) getting much more ownership in a JV large multi family deal, or 2) getting into larger Multifamily with less cash.

Here is the concept - target large Multifamily properties that 1) have been on the market awhile to where the seller would be fairly motivated. 2) properties that have been held for a long enough time that the sellers should have significant equity or be making a large profit in a sale.

Typically buying large Multifamily as a sponsor you give up 70% of the ownership to whoever brings in the equity... but say you request the motivated sellers to put a large amount of their sale proceeds back into the deal on a preferred return basis and count this as equity YOU bring to the table! Then you hold that for a few years, do a value add play on the property through better management and upgrades and you refi out and payoff the sellers fully. Now you are sitting with much higher ownership as a sponsor (if not fully owned), with much less equity.

This could also be a very attractive way to raise capital! Say you know a creditable person that could leverage their name to get agency debt. Then you have sellers put in 75% of the equity need and your creditable partner put in 25% of the equity. You then give a pref and a 50% upside on the deal to your partner and keep 50% of the upside as the sponsor for bringing in the other 75% of the equity (though it was simply the sellers doing for wanting a quick sale). Your partner now has 50% of a deal that took only 25% of the equity need... would be hard to turn that down. Win-win-win! Sellers are able to sell and maintain a good investment for the next few years. Investor gets more ownership for less equity. You get more ownership as the sponsor. What are your thoughts on this strategy?