There are three main steps to take an apartment deal from contract to close. First, the apartment syndicator performs detailed due diligence to confirm or update the underwriting assumptions. Next, the apartment syndicator secures a loan to finance the deal. The last step, and the focus of this post, happens when the apartment syndicator secures financial commitments from passive investors in order to fund the deal.
For apartment syndications, and the value-add investment strategy in particular, the syndicator will get a loan to cover the majority of the project costs. Generally, the costs that are not covered by the loan are:
- The down payment for the loan, which is 20% to 30% of the purchase price or the purchase price plus renovations, depending on the loan
- General partnership fees charged by the syndicator
- Financing fees, which are approximately 1.75% of the purchase price
- Closing costs, which are approximately 1% of the purchase price
- An operating account fund, which is approximately 1% to 3% of the purchase price
In total, a syndicator should expect to require 30% to 40% of the total project costs in order to close the deal. These remaining costs come from a combination of the general partners (i.e., the syndication team) and the limited partners (i.e., passive investors), with the majority generally coming from the limited partners.
The purpose of this post is to outline the five-step process for securing financial commitments from passive investors after an apartment deal is under contract in order to cover 30% to 40% of the project costs and close on the deal.
1. Investment Package
From the syndicator’s perspective, one of the first steps toward securing commitments from passive investors is creating an investment package. Before closing on the deal, the syndicator underwrote the property, conducted a rental comparable analysis, visited the property in person, and negotiated a purchase price. During this time, they become extremely familiar with the property and the surrounding area.
The purpose of the investment package is to take all of this knowledge gained by the syndicator from initially qualifying the deal and consolidating it into a digestible form so that the passive investors can review the deal and make an educated investment decision.
The form of and the information included in an investment package will vary from syndicator to syndicator, depending on their experience and the business plan. At the very least, the investment package will include the main highlights of the deal that are relevant to the passive investor. These highlights include:
- The purchase price
- The projected returns for the project and to the passive investors
- An explanation of the business plan including the exit strategy
- The partnership structure
However, ideally, the investment package includes much more about the underlying assumptions behind these investment highlights. For example, my company creates an investment summary package that includes the following sections:
- Executive Summary: A summary of the information that is relevant to the passive investor, which is expanded upon in later sections. This includes things like purchase price, return projections, and the business plan.
- Investment Highlights: An explanation of why this apartment deal is a solid investment. This includes things like our value-add business plan, the debt terms, the exit strategy, and anything unique to the specific deal or market.
- Property Overview: An overview of the property details. This includes things like the community amenities, unit features, a property description, the unit mix and floor plans, and a site map.
- Financial Analysis: This shows the underlying analysis and assumptions of the return projections. This includes things like the offering summary, debt summary, projected returns to the investor, and detailed proforma.
- Market Overview: An overview of the submarket and market in which the apartment deal is located. This includes things like job growth, demographic data, nearby transportation of developments, and the rental and sales comparables that were used to calculate the projected rents.
Mostly everything that a passive investor needs to know in order to make an educated investment decision should be included in the investment package.
2. Passive Investors Notified About New Deal
Once the investment package is created, which could take anywhere from a few days to a week, the next step is for the syndicator to notify their investor database about their deal.
I highly recommend that a syndicator gets verbal commitments from passive investors and creates an investor database prior to looking for a deal. In fact, understanding how much money they can raise will determine the size of the deal a syndicator should pursue. For example, understanding they will require approximately 30% to 40% of the project costs to close, a syndicator with $1 million in verbal commitments can look for apartment deals in the $2.5 to $3.3 million range.
For my company, once we put a deal under contract and create the investment package, we notify our passive investors about the new opportunity via email. In this email, we include the top two to three highlights of the deal, include a link to the investment package, and invite them to a conference call where we will go over the deal in more detail.
3. New Investment Offering Call
A few days to a few weeks after sending the notification email, my company hosts a new investment offering conference call. Here is a blog post I wrote that outlines my seven-step approach to preparing and conducting a successful new investment offering call. Read the full post for more details, but the seven-step approach is:
- Get in the right mindset.
- Determine your main focus.
- Introduce yourself and your team.
- Provide an overview of the deal, the market, and the team.
- Go into more detail on the deal, the market, and the team.
- Question-and-answer session.
- Conclude the call and send the recording to the investors.
This is my company’s approach, but it will vary from syndicator to syndicator. Some syndicators will structure their presentations differently. Some syndicators may host a video webinar. Others might just send the investment package and/or a recording to their investors.
4. Secure Commitments
After the new investment offering presentation, however the syndicator decided to approach it, the next step is to secure financial commitments from passive investors.
If you are a passive investor, if the deal aligns with your investment goals, you can verbally commit to investing in the deal. How you make your commitment will vary from syndicator to syndicator. For my company, we send our investors a recording of the conference call and ask them to send us an email with their commitments (and whether they are investing as an individual or LLC) and we hold their spot until they review and sign the required documentation, which I will outline in the next section.
If you are an apartment syndicator, this process will vary depending on your experience level. When you are first starting out, you will need to be more proactive when securing commitments.
A good strategy is to send emails to your investor database every week or two, inviting them to invest in the deal and providing them with a new piece of positive information. You don’t want to send them an email that only asks them to invest. You want to provide a new piece of positive information like a due diligence report that came back clean, a new development that was recently announced down the street, that the rental comparable report came back and the rents are higher than what you projected, etc.
Then, as you gain more experience and credibility from passive investors, they will come to you. Your goal should be to have 100% of the funding 30 days before closing. And once the deal is fully funded, don’t turn away interested investors. Instead, tell them that the deal is fully funded but that you will put them on a waiting list.
5. Complete Required Documentation
The last step is for passive investors to make their investments official by reviewing and signing the required documentation. There are five main documents that the syndicator needs to prepare (with the help of their real estate and securities attorney) and the passive investors need to sign in order to make the investments official. We will send our investors these documents to sign via Adobe Acrobat Sign.
Private Placement Memorandum (PPM)
The PPM is a legal document that highlights all the legal disclaimers for how passive investors could lose their money in the deal.
Generally, a PPM will include two major components. One is the introduction, which includes a summary of the offering, a description of the asset being purchased, minimum and maximum investment amounts, key risks involved in the offering, and a disclosure of how the general partners are paid. The other section covers basic disclosures, which include general partner information, an offering description, and a list of all the risks associated with the offering.
The PPM should be prepared by a securities attorney for each apartment deal. It will also include funding instructions. Once the investor has signed the PPM and sent their funds, we will send them an email confirmation within 24 to 48 hours.
For each apartment deal, my company forms a new limited liability company (LLC). My company is a general partner (GP). Our investors will purchase shares in that LLC and become a limited partner (LP). However, every syndicator should speak with a real estate attorney to determine which approach is best for them.
The operating agreement should be prepared by a real estate attorney for each apartment deal. It outlines the responsibilities and ownership percentages for the GP and LP.
Simply put, the subscription agreement is a promise by the LLC to sell a specified number of shares to passive investors at a specified price, and a promise by the passive investors to pay that price. For example, a passive investor that is investing $50,000 would purchase 50,000 shares of the LLC at $1 per share.
Like the operating agreement, the subscription agreement should be prepared by a real estate attorney for each deal.
Accredited Investor Qualifier Form
The accredited investor form required is based on whether the offering is 506(b) vs. 506(c). Most likely, the general partner is either selling private securities to the limited partners under Rule 506(b) or 506(c).
One key difference is that 506(c) allows for general solicitation or advertising of the deal to the public, while 506(b) offerings do not. But the other difference is the type of person who can invest in each offering type. For the 506(b), there can be up to 35 unaccredited but sophisticated investors, while 506(c) is strictly for accredited investors only. That being said, a syndicator should have a conversation with a securities attorney to see which offering is the best fit for them.
If the general partners are doing a 506(c) offering, they must verify the accredited investor status of each passive investor, which requires the review of tax returns or bank statements, verification of net worth, or written confirmation from a broker, attorney, or certified account. The accredited investor qualifications are a net worth exceeding $1 million excluding a personal residence or an individual annual income exceeding $200,000 in the last two years or a joint income with a spouse exceeding $300,000.
If the general partners are doing a 506(b), they are not required to verify the accredited investor's status — the passive investor can self-verify that they are accredited or sophisticated. In addition, for the 506(b) offering, to prove that the general partners didn’t solicit the offering, they must be able to demonstrate that they had a relationship with the passive investor before their knowledge of the investment opportunity, which is determined by the duration and extent of the relationship.
This form should also be prepared by a securities attorney, but only on one occasion (unless the accredited investor qualifications change).
Last is the ACH application. This document is optional but recommended. It will allow the passive investor to receive their distributions via direct deposit into a bank of their choice.
Once a passive investor has committed to investing in a deal, the general partners should send them these five documents to make the partnership official.
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.