The Wealth Elevator Syndication eCourse

Secrets of Syndications: Part 2

Video Notes

Loan Covenants

• Conditions of the loan with the bank
  • Debt service coverage ratio/equity position
    • Require certain LTV
    • If NOI drops or Cap rates go up the LTV goes up
    • Will force capital call/sale/foreclosure
    • High value add/forced appreciation projects will increase NOI which will decrease LTV
    • Theoretically, stabilized yield plays are riskier with this covenant, especially if the rent and vacancy assumptions are aggressive
  • Usually can’t get a loan with DSCR under 1.25-1.3
  • If you move your home/property into an LLC, there is a technical change that the bank can call in your loan fully due, but the chances of that actually happening are slim

Cap Rates

• ROI on the asset if there is no debt
• Class C: ~6.5%+
• Class A: ~4%
• Depends on the market/submarket
• Reversion Cap: Exit Cap rate
  • Estimated cap rate at disposition
• Price = NOI/Cap rate or cap rate = NOI/purchase price
• Conservative to estimate a higher cap rate at sale than acquisition (because assuming the property is going to be worth less, which is more conservative)
  • Gives a buffer for change
  • Rule of thumb: increase by 0.5-1.0%; or 0.1% per year
    • Based on the prevailing cap rate for the submarket and that asset class, not the purchase cap
    • 10 basis points = 0.1%
  • Things to consider
    • Bringing an asset up a class that has a lower Cap rate
    • Selling in a hotter market has a lower Cap rate
• The Cap rate is just the unlevered return an investor is willing to accept. Ultimately, it is just a calculated number based on what the buyer was willing to pay. It’s easy to get down in the weeds with Caps going up or down or being in X market or X class. It comes down to the local economy of the asset and what ROI the buyer is willing to pay based on the income.
• If it is a heavy value add, the purchase cap rate matters less, because you are attempting to significantly alter the NOI. Not buying off of current NOI/ROI but anticipated NOI/ROI
• A higher cap rate implies a higher risk

LP Etiquette

• If non-accredited investor, be especially careful asking questions about the deal because the operator will think you’re a PITA
• If accredited, ask the questions without being obnoxious
  • Don’t bombard them in person, send an email
    • Give them a chance to look it up, not be on the spot
• LP should find out the annual rent escalators, prevailing cap, and exit cap in the pro forma

In uncertain/risky times (COVID-19), want to increase occupancy so solidify cash flows and decrease rehabs

• Normally, want to balance vacancy with empty units to rehab to be able to push up NOI 
• Monitor occupancy and current rehabs in a deal to evaluate status
  • Should have one or the other occurring
  • Occupancy generates cash flows
  • Rehabs generate value
    • Not necessarily significantly boost cash flow but juices the equity (dividing the increase in NOI by the cap rate)