All Forum Posts by: Spencer Gray

@Taylor L. Thankfully no one was hurt, we just had to relocate some residents and most broke their leases. Insurance covered the cost of rebuilding the effected building as well as lost business income. We still had a major occupancy hit as we were in the middle of a full reposition.

@Nic Cooper brokers will know you are serious by the questions you ask and if you actually submit an LOI or not. There's no reason to get ahead and show proof of funds, it's rarely asked for in my experience anyway. I wouldn't come across too eager, the first deal you find probably isn't the best out there. Usually it takes looking at a dozen before one is worth making an offer on.

I would have to disagree with @Bjorn Ahlblad with needing a "buyers agent." Commercial deals very rarely involve a buyers agent and having one is a good way to not get a recommendation from the actual broker since they will have to split their commission. Also the fact that you have one will tip your hand by showing your lack of experience. If you need assistance on the purchase side I would utilize your PM and your (ideally local) attorney which you'll have to have anyway and should be able to help guide you through the process.

If it were me I would not plan on making any offers your first trip and spend your time meeting potential team members, brokers, driving different sub markets and touring different properties (on and off market) in those markets. The chance that the perfect deal you are looking for just happens to be on the market right now probably isn't the case. Once you have the groundwork laid, team in place, go home and underwrite all the deals that make it through your deal funnel, have someone on your team tour it, report back, then send in your LOI if it checks all your boxes. I wouldn't tour it until personally until an LOI or PSA is executed and you are in the middle of DD. Otherwise you're going to eating into your ROI by flying back and fourth.

EM stands for Earnest Money.

@Mike Dymski I don't understand why more sponsors don't include an exit cap sensitivity table with a range of beyond worst case scenario to best case scenario. I usually run an extreme table of 4% - 10% exit cap just to see. 

The entire concept of predicting market conditions in 10 years, let alone 1-2 years from now is a pretty futile exercise- which is probably why most sponsors throw 100 bps on the exit cap after 10 years because like you said that's what the rule of thumb is and the IRR looks much better than reverting to the historical average.

@Ade Babasola

The scenario you describe is why a lot of sponsors bring on partners as co-sponsors or co-GPs or even enter into a joint venture relationship structure with another equity group. The issue is how to split the carried interest or "promote" that the deal will produce to compensate the sponsor group as well as how cashflow is divided. Sometimes there may not be enough "meat on the bone" in a sponsors mind to share a significant portion of the promote with another sponsor, so a seasoned operator with a large pool of investors may pass on an offer to partner up. On the flip this is a great way when starting out as a new sponsor probably doesn't have all the pieces in place and it's easier (sometimes necessary) to bring on a partner to fill in the gaps.

The most common reason to bring on a partner to the GP/Sponsor group is add net worth / balance sheet liquidity as a guarantor on the debt side of the capital stack. In order for a sponsor to qualify for the most common types of financing the lender (Fannie/Freddie, etc) requires the sponsor have a net worth equal to the size of the loan and a certain % of liquidity. So even if a sponsor is a qualified operator they may not have the net worth required to get a loan to finance a deal - therefore they bring on a partner with a large enough net worth/balance sheet as a co-sponsor to guarantee the debt and then compensate them in some way. Usually the compensation is a % of the promote, or some kind of fee.

You can be just an LP, LP and GP, just a GP with no money in the deal, etc. It all depends on how much time and resources to dedicate as well as your tolerance for risk if you are a guarantor or Key Principal in a deal.

@Zachary Bellinghausen

That doesn't mean that the HUD 223f doesn't have some great advantages such as 35 year amo and term as well as being non recourse and 85% loan to post reno value... Indiana, Ohio, Kentucky are where most of our assets are located.

@Taylor L. Most deals with competent sponsors "level out" 2-3 years into a deal post value add with low double digit returns. That being said those deals were acquired in 2015-2016 where the cap rate / interest rate spread was much wider than it has been the last year or so. Our worst deal right now has experienced a major fire (destroyed 24 units), has had above average staff turnover (3 managers in a year), is in not the best part of town and is still returning a 4.5% annualized cash on cash. Another deal we sponsored also had a fire but is still returning 7% COC.

 My company looks at 3-4 dozen deals for every one we pursue. The majority simply don't meet our criteria for a number of reasons and are tossed in the trash after a 2 min read through. 

We have a few "top tier" partners/sponsors that we will participate in most of their deals unless it strongly goes against our internal criteria and there's not a very good reason to justify it. That's because we have confidence in their ability to execute and have built great relationships over time. 

I feel as though there's always sometime to learn and improve on in the multifamily space - I feel my underwriting and analysis skills have definitely come a long way over the past 4 years of investing and sponsoring MF syndications. If I hadn't leveraged the experience of others there's no way I could be where I am today. So definitely better at picking deals than when we started - but there's not a deal I regret doing (maybe the deal with the fire but what are you going to do?).  

@Zachary Bellinghausen To better answer your question I recently did an analysis of the 26 syndicated deals I am involved in one way or the other either as an LP or a GP and broke all deals into four categories:

1. Deals Exceeding expectations - >100 bps over proforma cash on cash return (11%)

2. Deals Meeting Expectations - 100 bps above or below proforma cash on cash return (50%)

3. Deals Not Meeting Expectations - >100 bps below proforma cash on cash return (15%)

4. Deals Not Yet Distributing (23%) (mostly new deals, yet to distribute) 

So the majority (61%) are performing as expected or better. A little more than half of the deals that had yet to distribute are now meeting expectations with the others falling behind slightly.

These are mostly B class workforce housing value add deals in the Midwest.

I also think it's just as important, if not more, to judge performance based on NOI since cash on cash can be manipulated in a variety of ways.

Hope this helps!

One issue that is rarely accounted for in underwriting by sponsors is that in deals using FHA/HUD financing (223f) is the surplus cash calculation and the limits it puts on distributions.

Even if your underwriting is accurate that the deal should and does produce 8% cash on cash, HUD rules on how the sponsor has to calculate "surplus cash" that can be distributed may not allow the sponsor to distribute that cash and therefore your returns will be lower, albeit usually only in the short term.

It's frustrating for all parties but there's a silver lining in the fact that it forces the sponsor to not drain the deal of available cash.

Hi Marcus,

My company partners with experienced operators/syndicators to invest alongside with and it can definitely be nerve racking the first time you wire over your hard earned money to Joe Schmoe syndicator. I've been there!

When investing with a sponsor the underwriting initially is much more about evaluating the qualifications and experience of the operator themselves, not as much about their deal. First start with their resume, how did they start? How long have they been doing what they're doing. Is this their full time job or a side gig? All the standard questions you would ask if you were interviewing a candidate for a job. That includes asking for several references - current investors are good but also brokers, lenders, and other third parties. They will be able to tell you how they have performed, or if they've never heard of them..

 Then I would get into what exactly is their business thesis is and how they execute on that strategy. You then need to weigh if their goals align with yours. They may be doing long term holds where you want more liquidity and shorter term flips, or visa-versa. What is their exact target criteria and why? If they can't list off their acquisition criteria, or if it's all over the place, I would be concerned. What kind of debt are they using? Who is guaranteeing the debt? Not that some operators can't do multiple things at once, but they better have a proven track record and the infrastructure behind them to execute. Ask them about their worst deals, and what they did. If they don't have any "bad deals" that's not necessarily a good thing.

Who comprises their team and what systems do they have in place? Are they a solo operator? If so what happens if they get sick or get hit by a truck? Are they going to be managing the deal, or is it a third party? It's not that someone smart starting out on their own can't be a good operator, but they need to have systems in place to handle everything and contingencies if something happens and the One Man Band can't do it all. 

I would ask for a very specific track record: how many deals like this have you done in terms of size, market, asset type/class, etc. They may have a long track record of flipping SFH but repositioning a large apartment is totally different - you may not want to pay for their education while they figure it out (maybe you do want to take the risk but you should be compensated for it).

It's often how they answer the questions, not exactly what they say. You can usually tell if someone is giving you the whole story and are open or if they are guarded or making it up as they go. 

I'll end this post with a tired old saying that may have been posted while I've been writing - "a bad operator can screw up a good deal but a good operator can turn a bad deal into a good one" (or something like that). 

We've invested with 8 different operators in nearly 40 different deals and have been able to scale a diversified portfolio of cash-flowing assets in a way we could never have if we started from scratch. I personally believe if you have the means and the discipline it's the best way to invest in commercial real estate.

Hope this helps.

Appreciation is just the difference between the purchase price of an asset and the price the asset is sold for. Like others have said it's hard to know what will happen during a multiple year hold so any assumptions about exit conditions should be conservative and taken with a grain a salt.

I personally run a wide sensitivity analysis table on Terminal NOI vs Exit Cap Rate. That gives us a good understanding of what range of IRR we can achieve depending on asset performance and market conditions. To me this is not even a tertiary concern as I'm much more focused on Cash Flow, condition of asset, market, location, etc. It's one of the last things I do when underwriting a deal.

Anyone who is counting appreciation or amortization into return before a sale or refi is counting their chickens before they hatch and are usually trying to inflate return projections. 

@Alexandra Fisher

If you are an accredited or sophisticated investor I recommend spending time underwriting operators/syndicators in the Midwest and South East and invest in multiple projects to build a diversified portfolio of multifamily investments. If you only have $100k to invest, I would invest $25k in four B/C class deals that are 100+ units. 

This way you have efficiencies of scale, and excellent risk adjusted return. The time you save not dealing with D class properties in war zones you can spend on... well whatever you want! 

I also find you that aren't sacrificing return and will eliminate a lot of risk, especially compared to smaller properties (i.e if 2 tenants move out in a 4 plex you're GPR is shot to 50%, if you are in a 200 unit deal and 10 people move out, it drops 10 units you're still at 95%!). Not to mention on site professional management.

I would not recommend this strategy only if you absolutely need total control of a project, you really want to pick out the paint color, and think you will be a better operator than someone who has been doing this professionally for years/decades.

Some people don't like this approach because they really want to get their hands dirty, to that I would say find a hobby, treat real estate like it should be treated, as a business and an investment.