All Forum Posts by: Joseph Bramante

Originally posted by @Robert Withers:

Joseph
I am a lender and investor located in NY , thanks for your post .
Question , are there any capital call obligations associated with your syndications for capital improvements , cover unexpected expenses , etc ?

 Robert,

Very insightful question and one that ALL PASSIVES should listen to. 

We do not have any capital call obligations for Capital Improvements since all of our rehabs are financed via bridge loans. A bridge loan is a loan that includes a rehab component in it. Similar to how houses have an ARV, we make a similar argument to the lender and state that we need $XX to do XX repairs and the new rent after said repairs will be XX and therefore the new value will be $XX million. Lenders, as you know, are very conservative, so it helps if you have a track record of success doing this and your numbers better check out. They have a team of analyst who will be reviewing the numbers and often times do a bit of horses trading with you during the negotiations. So we typically ask for MORE money than we really need (bury it in the various line items) because the lenders will usually cut it anyway. If they do not cut it, and you finish with more money than you need, than the remainder goes back to paying down your principal. I have yet to have that happen though and we always spend every dollar.

However, I have seen cash calls during rehabs where things don't go to plan and occupancy drops down to 70% temporarily and the sponsor has to do a 50K cash call to pay the bills. This exact scenario ALMOST happened to us a few months ago. We were being very aggressive with our rents during a rehab on a 140 unit property that we purchased last Sept and had pushed rents $200 above there previous rent ($100 above the proforma rent we told investors). We experienced some push back in early May, but we held the rents high because we were coming into the "renting season" of June-Sept which always has lots of demand, so we pushed through. Because we had an active rehab going on which was pushing residents out to renovate their units, and because we had stopped getting new leases for 6 weeks, our occupancy dropped to 75% rather quickly. We took immediate action, dropped rents back to proforma (only $100 increase) and started leasing again. We had lots of cash on hand but warned investors in June of the potential for a cash call in September if leasing didn't pick back up. Property is nearly 90% leased right now and no cash call was ever needed. 

I have never had to do a cash call on any deal we have syndicated, knock on wood, which says a lot considering we only do big value add deals, very risky stuff, but rewarding. 

One of the best arguments for using a syndicator who has management in house, is because they can be strategic about which invoices they pay on time and which they pay late. This was useful for us in the above scenario for the month of August as we delayed a few invoices by 30 days as a precaution since we had no crystal ball to see how long the recovery would take.  

If a cash call is ever needed on a syndication, and you don't have the funds,all that happens is your  % ownership in the deal drops by a fraction of a percent, generally. If you are the biggest investor in the deal, and you don't pay, then that could cause a bigger problem since the syndicator was likely counting on your cash call and will now need to fund it himself, assuming he has funds. . On bigger deals, the cash call rarely is more than 100k, and the investment would have been $2M plus, so you are splitting a 5% cash call over 20 to 30 guys. 

If no one has the funds, investors or syndicator, then an outside investor will have to be brought in and the syndicator will likely be fired soon after. 

Originally posted by @Simon Ghandil:

Here's my reason for not jumping into the multi-family market, maybe you can change my mind, or shed some light.

I only buy SFRs, usually pricing around $50k for cash, then I'll owner finance them as is. Its convenient for me because it eliminates the need for me to maintain the property, the tenant/buyer would have to take care of all repairs, and I have no debt.

I can't owner finance an apartment complex, so theres a chance my phone will still ring because something inside the unit broke, and I won't be able to purchase many complexes cash, so I will have debt.

 Great question. One of the biggest differences between owning 50 rent houses and a 50 unit complex, is the 50 unit complex will have a full time property manager and maintenance man. The owner of the MF complex has ZERO communication with his residents. So that entire scenario you just described would never happen. 

Also, since you are owner financing your houses, I am guessing that the interest rate you are charging is 6-8% and their downpayment is 10%? Please correct me if I am wrong. Therefore, I am estimating your return over a 5 year period is 8% x 5 yrs plus 10% downpayment, so 50%? Did I do that right? (Sorry not a SF guy). In a MF property, your same 50k investment in a yield play property (lowest returning type of property) would be 6-8% and the property would sell in 5 years for over 100% return usually, or a refinance in 5 years for 60-80% return and still keeping the 6-8% yearly income. So assuming the refi scenario, you would make 8% x 5 years plus 60% from refi, so 100% return in 5 years. 

Which would your prefer, 50% or 100%?

Originally posted by @Adam Widder:

My issue I'm facing is financing.  I want to start in 2-4 MFs but lack the down payment to get started.  My first thought is how to find the small banks or credit unions and how to go about the conversation? 

My other concern is how to set up the business. Should I make an LLC or just keep the taxes in my name with an umbrella policy?

 That is a common issue. Also, a property is not technically a MF until it has more than 5 units. There are two ways you can go about getting the money. 1) buy at least 10 rental houses, then sell off entire portfolio so you get a nice chunk of money to invest in a MF. 2) Live ultra lean and save everything, then find a local syndication who will accept non accredited investors with a low minimum investment. 

I would recommend you do the first option since I have seen people grow a quick chunk of money faster through rent houses than investing a small amount in MF and hoping it grows. 

MF works better with larger chunks of money (50k or more) since it would be challenging to deploy 50k all at once in rental houses, whereas in MF you can deploy it easily in a single property. 

In regards to the setup, if investing passively, the syndicator will have already set up an LLC. If buying on your own, set up an LLC. DO NOT PURCHASE IN YOUR NAME. The property will also have its own umbrella and liability policies, in the name of the LLC.

@Ivan Correa In general, for the average investor, the sky is the limit. Once you start raising billions, i imagine things change, but I am not certain on that. 

Originally posted by @Steve Vaughan:

Commercial financing is what's keeping me out.  When you refinance, what are the terms in general?  Typical 5 yr calls and rate adjusts?  Do they expire and require new financing every 5 yrs?  That'd be a hoot.  What's an appraisal cost on a 100+ unit complex?

Other terms, like 80% occupancy and reporting detailed financials and taxes every year to prove you are worthy?  What if the institution just doesn't have an appetite to finance that type of asset anymore?   What will happen in 5yrs if you have to face a due in full?  

What say does a little investor have in any of this or other materially significant decisions?  

At the beginning of the year I had 3 commercial loans, now I have none. Too much risk. Too much of a pain reporting annually to an institution with hat in hand. If I didn't want any control, I'd just invest in a mutual fund or REIT.

The terms are all over. Just depends on the deal. If its a long term hold, you will refi with agency debt. If short term hold, maybe CMBS for max cash out. Usually fixed rate with 5 year terms, when done. Again, it depends. We do a lot of value add (almost exclusively), so most of our acquisition loans will be a 2-3 year term bridge loan with a construction hold back. Then we would refinance and depending on how the previous 2-3 years went either a)another short term loan, low leverage with low prepayment in preparation for selling; b) 5-10 yr CMBS loan with a higher rate but also higher leverage and max proceeds; or C) fannie/freddie loan with low rates and average leverage with longer term. Those are just some option. There are many more options available and you should work with a reputable mortgage broker to specify the best option for your situation.

Yes, we do lots of reporting to the lenders. everything you mentioned above. If the lender isn't interested in refinancing, you just get a new lender. The scenario you mentioned above would almost never happen. there is always a lender who will take the deal. but assuming another major market down turn like in 2007, and your loan expires with nobody interested in refinancing, then you would be forced to sell. The lender would probably give you an extension until you could sell it. Oh, and if you know you have a loan expiring, you will reach out to the lender 6-9 months before hand to touch base and see what your options are. SO you will know 6-9 months before hand if they will or will not refinance. 

In most syndications, investors with under 20% ownership have little input. Also, since most syndications are GP/LP agreements, then the investors only vote on major events like selling, refinancing, removing the GP, etc. 

Did you know that if you invest with a syndicator (aka a General Partner, GP), and if the deal is not going well, the Limited Partners can call a vote to have him removed. It usually requires a 75% majority, but it can be done.

If you didn't want any control, you would just invest as a passive with another syndicator. They have an entire team of people to manage the lenders. But yes, for the syndicators coming up in the industry, it is a lot of work. 

I hope I answered your questions. 

Originally posted by @Account Closed:

Originally posted by @Joseph Bramante:

Once you have identified your market, start searching for syndicators in that market and reach out to them. Ask if they accept non accredited investors. If you see any type of advertisement for them anywhere, then they do not.

I don't follow, what is point of picking a market, why not just pick the best deal you can find in any market (assuming he/she will accept sophisticated investor)

Personal preference. Some investors like to have more control and like to chose what market there money goes to . I always thought it was ironic that the same investors who are not experienced enough to chose a good deal from a bad deal are somehow able to chose a good market from a bad market. 

We are in houston, and last year we purchased one of our most successful properties to-date, in a market that everyone said was terrible because the price of oil tanked in 2015. So really it comes down to the syndicators experience and knowledge of the market, and not so much the market itself. 

If you don't know the market very well, then you/syndicator had better identify an emerging market since "a rising tide raises all ships". Meaning, even if they buy in a bad sub market within an emerging market, because they correctly identified that the whole market is rising, that bad submarket will rise with them. Obviously exceptions apply and this is just a generality  

@Account Closed Please chime in. 

https://www.sec.gov/fast-answers/answers-rule506ht...

@Johnny Quilenderino I read your question but it sounds like you are already on the right track by attending your local RE meeting. Do follow up with us after your Tuesday meeting if you have any more questions.

1) Read, read, read. I think @David Thompson has some great blogs for you to refer to. He really goes into detail about what a syndication is and is not. In summary, it is just a company that a sponsor forms with an operating agreement that states how the company will operate and what voting rights the members have. This company is filed with the SEC under the REg D exemption and allows you to legally raise money with it. So you form the company, file with the SEC, then start raising money. Your attorney will do the first two parts for you and you can expect to spend 20-50k of your own money just to be in the position to start raising money. The expense is refunded to you at closing. The company raises money and adds new members until it has enough to buy the property in question. Thats basicly it. 

2)Pro, can raise lots of money and buy bigger, more economical properties. Can grow much faster. Requires strict project controls. Dont mix personal and business funds. 

Con, upfront cost. can be complicated. risk of fines and jail time if you violate SEC rules, though rare. Risk of lawsuits if you mismanage people's money, or if a deal goes bad that you are in control of. 

3) It helps if you do the first deal with your own money. Or 1 or 2 other partners. Get some street cred first. It is not recommended that your first multifamily also be your first syndication. My second multi was my first syndication. 

4) I had a mentor and local RE group that taught me the basics, then learned the rest through my attorneys and years in the industry. Check amazon.com and see reviews. DAVID do you know any books? 

5) You will raise most of your syndication capital at your local re club initially. Also, for your first deal, your fees would be very reduced since you are learning on their dime. Maybe only a 1% asset mgmt fee with a 10% pref and 80/20 split after. You are trying to compensate for your lack of experience with a more attractive compensation model. DO NOT try to get rich on your first deal. Just get on base. Its a long game. 

6) I bought my first two properties while still working. Although when I syndicated my first deal, i was only working in sales so I had lots of free time and wasn't as stressful. If your job is very stressful or demanding and doesn't allow you to take time off "to visit clients" or "Lunch meetings" (hint hint), then maybe reconsider the syndication thing. Closings, property inspections, lender walks, investor tours and many other things all happen during business hours. 

FYI, if that property is 99% full, the rents are too low. But it sounds like you have identified that already. 

The time frame to form a syndications is 2-3 months. So if you haven't formed the syndication yet, you do not need to be looking at deals. Unless this syndications is specific for a single deal that isn't going anywhere. Most of our syndications are a "blind pool" meaning the exact property hasn't been identified yet but we have the specific parameters identified that it will meet. 

So first, form syndication. If your 145 unit deal is still there, then you need to be hustling your butt off to talk to everybody you can. Just DO NOT solicit. You have to sell without selling. Good luck haha.

Todd Dexheimer sounds like you have some unique experiences. Please disclose how many multi families you have purchased? Greater than 20 units.

Michael P. Mark Hoover NO, you do not need to be accredited. Initially, syndicators operate under a 506 (b) offering when they are getting started which means they can accept up to 35 non accredited investors. The catch is they can NOT market or advertise their offering so it is up to the non accredited investor to seek them out and pro actively ask if they have anything. The other type of offering is a 506(c) offering which is what most syndicators transition too as there deals get bigger and they get more established. This offering allows general solicitation but every investor must be accredited. Once you have identified your market, start searching for syndicators in that market and reach out to them. Ask if they accept non accredited investors. If you see any type of advertisement for them anywhere, then they do not.