All Forum Posts by: Mark Mosch

HI Samir,

When rebuilding the pro-forma you do your best with whatever numbers you can get your hands on. They usually put what they think is a good loan in there that might have no bearing on your actual finance. For repairs and maintenance it might be artificially high or low based on events - so the trailing 12 month numbers would be helpful but you should also look to some online sources that will tell you approximately how much per door per year you should allow for all cap ex - repairs/maintenance and bigger stuff. There's charts about age of building, or if its an A, B, C class etc...and what those amounts should be. Google them. Do a reality check of those numbers vs what they give you. When i look at a bigger property, i do it with the prospective property manager and I ask him to tell me what he could run it for - and have him make his own pro-forma in terms of estimated expenses, potential payroll to run/manage it...etc... If you work with an insurance broker, you can send them the setup or MLS listing and they can usually give a quote quickly. A lot of people have been having problems with the seller having a long-time relationship with an insurance company that won't extend the coverage to the new buyer, and the new insurance quote is x2 what it shows on the seller pro-forma. Also check the vacancy rate for the area - they usually will just plug a 5% number on the proforma, when the property's history might be 7 or 8% or worse. The other big pro-forma issue is taxes. They almost always list existing property taxes - from the sale a few to many years ago. When you buy a new place the taxes sooner or later (depending on locale) will adjust up to reflect the acquisition price. That could be a killer to ROI too. Things like these will help get you a more realistic picture than the fantasy pro-forma the seller's broker puts out.

Sameer, you shouldn't be underwriting with assumptions - you should be finding out the exact numbers.  Don't assume you can get a certain insurance rate until you have an actual quote.  Don't assume  mortgage rates and terms until you have a lender giving you some ballpark numbers after seeing some preliminary details on the property.  Don't assume anything about expenses until you've seen 12-months trailing numbers.  Since this is out of state you will have a local property manager involved.  Don't assume anything as to expenses - have the property manager walk the property with you and give you a pro-forma as to what they think it would cost to run, and what vacancy and rental rates they would be able to expect there.  You really should not be assuming anything if you can avoid it.  Take the brokers pro-forma P&L and then rebuild it with the facts as you see them, not the rosy ones that the broker wants you to think about.

It's all very doable with a little work.  Good luck!!  

AJ - it's all about the comps - there's not enough info here for us to tell you.  If this was in LA, the answer would be one thing, if in Tulsa something else...etc....  You should get the information of all multi-families sold in the general region/metro and then chart them out.  Enter each property into a big spreadsheet and cover all items like age of property, price/unit, price/sq ft, cap rate (if you can get it) avg rent/unit...things like that.  Then put this building into that chart using that asking price.  Then you can look at comparisons and have a basis for getting back to them with a different price.  If all the other buildings within 5 years of building of this one are all trading 20% less on a per square foot basis, then something special about this building needs to justify that difference.  So you need to construct a data-based story for the seller and show him your calculations, charts, and data points - and tell him why your numbers are more fair and accurate.  Now if he has multiple bids at his asking price, this aint gonna help, but if it's been on the market for a while, you can use this approach to start a dialog on where the property 'should' sell at.

Rob - i don't think he's talking about a syndicated loan, though - just a syndicated Real Estate deal structure.  Different animals - although both are complex.

Agree that 1% is usually the standard especially on the bigger stuff and you look like you're not serious if you don't.  That being said, i just did 2 separate smaller properties (12-plexes that were $800-$900k each), and got away with $2,500 on both - i just put it in the offer and it didn't get questioned.

Wow - this is where it's essential to have an attorney to make sure you are compliant with SEC rules and also just don't get yourself in trouble with investors.  I've done several syndicates, and there are 3 key documents you need:

1.  Private Placement Memorandum (PPM) - which is a writeup of the reason why you think this investment is a good idea.  If it's a fund, it's all the background info as to where you want to look for investments, your strategy...etc....  If it's for a single building, then you will put in there all the due diligence information about the property - neighborhood info, property details, pro-forma cash flows...etc...  Lots of pictures, graphs, and charts.  Also - about 50% of the PPM is just disclaimers about how this is super risky, only accredited investors should invest, they could lose all their money...all that stuff to scare people off that is required in all these type of documents.  Here you also propose your split and how the payout will go.

2. Operating Agreement. This is the actual legal operating agreement for the proposed entity and it puts the more descriptive information in the PPM into legalese. Every LLC must have one - and the one for a syndicate is a little more complicated than a basic one for a simple LLC.

3. Subscription agreement. This is what the investor actually signs. They first start with something that says how much the investor will invest, then asks how the investor will hold title. There usually are different signature pages for an Individual vs an LLC, vs a self-directed IRA.vs a Trust..etc...etc... Another wrinkle that's useful is to have the subscription agreement have something on it called a joinder - which means that by signing the Subscription Agreement they agree to it and also the operating agreement, so you don't need to keep track of all these signatures for both documents - and helps keep it simple.

All that being said - I'm not an attorney - so this is absolutely something you have to run by an attorney.  The good news is you can google sample agreements and get a template which you then can adapt to your situation - then present it to your attorney and ask them to edit what you have.  You should save a ton of money vs. asking the attorney to create the whole thing themselves.

Good luck!

You need to find a local community bank to get the best terms.  Someone like Wells Fargo or B of A has a lot of stringent rules they need to follow, but are a pain to get anything done with.  The smaller guys are a little higher in interest rate but usually can get the deal one.  You will most often have a 20 or 25 year amortization, due in 10 years.  Your rate on something small like this would probably be 4.9-5.5%.  I would expect them to ask you for 25-30% down.

You're in Florida - so the LLC's there are fairly strong. In California, they suck. That being said, form an LLC for yourself, the "James Reiter Real Estate Company, LLC". Then, that is the entity that does the investments in the syndicates that you set up. You fund your LLC with a capital contribution, then the LLC carries an "Investment in XYZ Syndicate LLC" when you form your syndicate with the other partners and buy building XYZ.

That should give you pretty solid protection and tax advantages.   Obviously, you should review with a CPA practicing in Florida to make sure you've got everything covered, but that in general is the approach.

i had issues with that too - you do have to shop around.  I was getting really screwed by some big firms like Farmers Insurance who were pricing the policies at some ridiculously high replacement costs so i was getting killed.  I ended up finally finding some more commercial/business oriented firms that were more reasonable - cut my estimates in half.  Try CBIC - they are a national firm, and a subsidiary of a public company.  If they work in your area, they could be good.  I also got some great rates via Nationwide in the midwest, but you'll need to see what their rates would be for your geographical area...Good luck.