All Forum Posts by: Spencer Gray

@Owen Thornton If you are going to raise money you are technically selling a security so regardless if you're serious about it you should speak to an attorney that specializes in syndications / securities. Research "Reg D 506(b) and Reg D 506(c)".  

All the national brokers and big property management software companies post quarterly cap rate surveys and reports. 

I second @Brian Burke 's The Hands Off Investor for further reading for anyone interested in being a passive or active real estate investor. 

Syndications can be a great way to invest in great real estate projects without any of the hassle, but certainly research on any sponsor you consider investing with.

I agree with @Evan Polaski . That being said this is what I did:

I first studied others models. Built my own, re-built it. Underwrote every deal I could get my hands on. 

Then I outsourced to a third party underwriter who I could tell exactly what I wanted to see.

I then hired an in house acquisitions director who manages underwriting. We then hired an analyst who is doing much of the basic modeling at this point while my acquisitions director focuses on the deal and not data entry. 

I still draft the business model, create the strategy, and I still tweak to our models.

I would treat it no different than a large apartment syndication. I would find a way to come up with at least 10% of the equity needed for a deal so you are truly a partner with skin in the game. I would include in the operating agreement a simple preferred return (8%+-) paid to all partners, 70% of remaining cash-flow goes to the partners, 30% goes to you. After a sale or refinance all cash goes to pay all partners their capital, any remaining profit is also split 70/30. You can change the numbers, but that is a very common way to do it that most attorneys and sophisticated investors will be familiar with. 

As far as "taking over the deal," that's a little more complicated. Many investors don't want to be taken out of the deal only for you to make more profits while you keep holding - it just doesn't seem like a partnership, more transactional. However, if you're upfront about it, and they can still make a good return, they might not care. You could offer that they are "out of the deal" or their share of the profits is significantly reduced after a certain negotiated return threshold, say a 20% IRR. Or you could simply buy them out at some point. Keep in mind proceeds for a refinance usually first flow to return capital. If you kick them out of the deal after only getting their capital back, they may not be too pleased with only getting cash-flow and no upside.

(Not legal or financial advice)

@Ryan Prichard , congrats on finding a deal!

Is it under contract or accepted LOI? Either way I would 100% use financing, there is no reason not to take advantage of still incredibly low interest rates with long term non-recourse financing (Fannie/Freddie). There are some good bridge terms out there right now and it's not a bad option, I would just make sure to shop around. Also look into a rate cap if it's a floating rate, SOFR will most likely rise when the Fed hikes the fed funds rate.

For your raise with 75% LTV, assume 70% LTC so you'll need 30% of the purchase price for downpayment, closing costs, fees, inspections, etc.

(2) A very common structure is to pay an annual preferred return between 6-9%, with a split of cash-flow above the pref 70/30+/- LP/GP . After capital is returned 100%, profit is split 70/30 LP/GP or whatever %'s you and your investors agree to. You can add different classes of units, more water falls, the sky is the limit. Simple is often the best, however. 

(3) It depends on the project, such as the vintage, the scope of the renovation, market conditions, etc. I prefer to over capitalize to the point where it doesn't effect returns materially.

(4) Whatever your accountant says is the best, but Quickbooks works. If you are doing property management many of the functions of property accounting will be included in your property management software.

(5) There has to be a captain of the ship. While major decisions after the purchase may be appropriate and fair to give members a vote, or even the ability to veto certain actions like a sale, once the decision has been made it's the responsibility of the managing member (assuming you are using an LLC that is managed by a manager and not by members) to carry out the business plan. When we present a deal to investors it's made clear that our team is running and operating the project. We always welcome input, suggestions and assistance, and 100% transparent but at the end of the day the buck has to stop somewhere.

(6) I agree with @Jonathan Twombly , you are offering a security, although most like one exempt from registration - but you still have to file for the exemption. I also highly recommend that you bring in a partner that has done multiple successful syndications, even if he is mostly just advising and assisting in asset management, it would be worth giving a slice of the GP to have someone in the deal with experience. 

Good luck with the deal!

(Not legal or financial advice) 

Co-Star, Yardi, Real Page, Marcus and Milichap, Cushman and Wakefield, Berkadia.

We aggregate all these reports and over at the Gray Report. 

Co-Star does a great job but it's not free. 

@Vasundhara Ranjani We use Merchants Capital based out of Carmel, IN for our HUD 223(f)s as well as their bridge product to close the transaction. Close times are very long (we are closing on one this month that we've been working on for 14 months! Pre-covid it still took 4-6 months to close a HUD 223(f)). They are fee heavy, although almost all of the fees are rolled into the loan itself.

Long story short, it's a headache, but worth it to lock in sub 3% for 35 years. 

I would only advise going this route if the project is a long term hold, otherwise go agency or bank with flexible pre-payments. 

What's more likely to be true in the next 5 years: cap rates are lower than today or higher than today?

History, current market fundamentals, and investor demand for yield lead me to believe that cap rates are more likely to be lower in the near future rather than higher. 

But that's just evidence based speculation, just a guess. Who really knows, as @Nick B. said.

I like @Joshua Janus 's approach and it's similar to what we do. We build several sensitivity matrices that compare exit cap rate and hold period, as well as NOI at sale and exit cap rate. This allows us to look at a range rather than being forced picking a specific cap rate in the future.