The Wealth Elevator Syndication eCourse

Secrets of Syndications: Part 1

Video Notes

Economic Occupancy/Vacancy: leased units not collecting rent – (people that live there, but don’t pay)

• As opposed to non-leased units
• Occupied units with tenants not paying
  • Doesn’t take into account tenants paying late
  • Aka “bad debt”
• Pro forma should take into account both
  • 2-3% typically non-paying tenants
  • 92% leased-up units are considered “full occupancy”

When a business loses money, different levels of cash infusion

• General Partners give a loan
• LPs asked to give a loan
  • 5%, 8%, 10%
  • 6-12 month loans
• Capital call
  • Not necessarily going to be a large amount per share b/c if everyone in the deal chipped in a bit then it turned into a large amount of money
  • Similar to having a rental property where the investor may have to pay for a large unexpected expense, and not have cash flow for a couple of months. It happens
  • If something dramatically bad happens – can just firesale the deal and get out
  • If I cannot do the capital call, then my shares get diluted, and nothing else happens
• Ask to look at T12 and see what the worst month was in terms of NOI
  • If negative month(s), how many months with the capital reserves carry the business before reserves are exhausted?

General goal to double investors money (100% return) in around 5 years

• Returns will go down as CAP rates compress in the coming years
• Cash flow-based deals will be yield deals: Lower total returns
• If forgo cash flow (large value add): then a larger return upon sale

Refinancing

• Try to analyze deals assuming no refinance
  • Refinance assumes the best-case scenario
  • If value-add and property value go up, you might want to take that value and refinance it out for cash to put somewhere else that will also make you money
  • Commercial prices are based on NOI, and Residential based on comps
  • Refinance is not taxable to investors as considered a return of equity
  • Refinancing will decrease the cash flows based on the higher loan amount/debt payment. So, while the refi is the best-case scenario, if you take the same scenario and don’t refi, this will increase cash flows and total return on exit
• Forced value appreciation of the asset by increasing NOI
  • Increased NOI will allow for bank supplemental loan on the new (higher) value
  • Take out equity, original investment back
    • May or may not dilute shares (stated in the operating agreement)
    • “Infinite returns”: Had refinance, got initial investment out, but still generating returns with no more money in the deal
• Not taxable money
  • It’s a loan

Deals with a preferential return, “pref”

• Usually, if a deal has a pref, the GPs are just getting more on the backend than they would otherwise
• Lots of different ways GPs structure deals
  • Pref, 80/20, 70/30, waterfalls
• Ultimately, look at what the returns will be every year and the total return at disposition
  • Look for a page that shows an example, “If you invest $100k, expect x return.”
  • Everything else superfluous
  • If the sponsor doesn’t live up to the pro forma, don’t invest with them again

Be wary of deals with quick exits (3 years)

• Riskier because less room for error if there is a market downturn and they are contractually forced to sell in a bad year

Annual Rent Escalations

• Market-specific
• Normally 2-3%
  • 5-6% is too aggressive
  • This is separate from the initial increase in rents at the acquisition
  • $8-10k rehab unit is significant and enough to increase C class to B class

Need to come up with personal investor philosophy

• How much risk am I willing to take
• What’s the acceptable amount of reward
• Cash flow vs value add/appreciation, yield vs ROI – what are your goals?
• Work with bigger institutions?
  • More reliable, but more fees

GP will analyze deals by looking at the investor return

• If the LP return is above the 100% return in 5 years, the GP will adjust the GP/LP splits to bring it down to 100%
• If you see a deal with 100% return and 50/50 GP/LP split, it’s a fat deal
  • If that deal goes “wrong” and the asset doesn’t perform as expected, would the GP revise the splits to keep the LPs happy at proforma return?
    • Instead of 50/50, it is 70/30, but LPs still 100% return

Sucker Deals

• Multiple syndicators trying to raise money
• 5 % rent escalations
• Exit cap rates the same or go down
  • Assume it will sell in a stronger market as opposed to a weaker one
• Loan Guaranty fee should be included in the Acquisition fee  %