June 21, 2019

JF1752: How To Secure Commitments From Your Passive Investors Part 2


Theo continues the conversation from yesterday about securing commitments from investors. We’ll be hearing more about how to create an investment summary. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.


Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks.

Each week we air two podcast episodes that are part of a larger podcast series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these series we offer some sort of document, spreadsheet, resource, template for you to download for free. All of these free documents and free Syndication School series can be found at SyndicationSchool.com.

This episode is a continuation of a series we started yesterday, or if you listen to this in the future, the episode before this one, which is “How to secure commitments from your passive investors.”

In part one, which I recommend you listening to before this episode, because we are continuing off of that episode, we introduced the five-step process to securing commitments from your passive investors, which is to 1) create an investment summary, 2) e-mail your investor database, 3) conduct a conference call of seminar, 4) follow-up with your investors, and 5) send the proper legal documentation. Then we also began to discuss step one, which is to create the investment summary. We got about halfway through that, so we’re going to continue and hopefully finish up going through the investment summary, so that next week we can move on to part two, which is to e-mail your investor database.

In the first episode we went through the different parts of the investment summary. First we talked about the executive summary, which is like 1-2 pages of the actual report. It essentially summarizes all the important information in the investment summary. Everything below that essentially goes into more detail on what’s included. We went over examples of things that you’re gonna wanna include on that, and again, we also offered you a free template to download, a free investment summary template that you can download, so everything that I’m discussing on the show is actually on that template.

After the executive summary we go into the investment highlights, which discuss things like the business plan, the interior renovation projects, your capital improvement budget, your debt summary, things like that.

The third section is the property overview. It goes through the description of the property, the interior/exterior amenities, the unit mix information, as well as the site plans.

We’re going to continue on today, starting with the financial analysis. If you remember, I said this on the previous episode as well – the investment summary is very similar to the offering memorandum structure that was created by the broker. Obviously, the information is different, because it’s your information, based on your business plan, and based on your underwriting… But the structure is very similar, and a  lot of the data that you will include on the investment summary can be pulled from the OM – pictures, property descriptions, things like that.

So the financial analysis — if you remember, you underwrote the deal with either the simplified cashflow calculator that is available for free at SyndicationSchool.com, or you took that simplified cashflow calculator and went ahead and customized it to your liking, or using some sort of other calculator, but… Essentially, you want to get across the main highlights of that cashflow calculator without actually sending your investors a cashflow calculator, because that’s gonna be a little overwhelming.

That’s why it’s ideal that your cashflow calculator has some sort of summary tab or summary page that you can easily pull information from to include in your investment summary. You can really pick and choose what information you want to include. Obviously, you wanna focus on the important returns information that’s relevant to your investors, but as you’ll see in our template, on the first financial analysis page you’ve got three data tables. The first data table focuses on the equity returned at sale, so essentially it goes over all of our disposition assumptions. And again, for the example that I’m looking at we projected an exit sales cap rate of 7.5%. So based on the exit NOI in five years, on a 7.5% cap rate, we went ahead and put in there our projected sales price, as well as the sales price per unit.

Then we included any sales expense – closing costs, disposition fees, broker fees, things like that. And of course, we’ve gotta pay back the rest of the loan, so we’ve got that… And then we have to give the remaining investment back to our investors, which leaves us with a gain at sales, or sales proceeds. Then based on whatever the partnership structure is, here’s how much money we expect to distribute to our investors at sale. That’s pretty important.

The other data table is the yield projection. If you remember, in the executive summary we included the cash-on-cash return and the internal rate of return. This yield projections data table shows you where we got those numbers from. We’ve got “Hey, here’s the net cashflow, plus your net profit at sale, so here’s your total net return, and then based on your initial investment, here’s what the ROI is, as well as the internal rate of return.”

Now, you wanna make sure that when you’re discussing these ROIs that you distinguish whether you are including the sales profits or not including the sales profits… Because if you are doing an average annual cash-on-cash return, and you aren’t including the sales proceeds, then it’s gonna be a little bit lower. But if you are including the sales proceeds, you’re gonna be making 100-something percent return in the year five, or something like that. A pretty high return, like 50% return at year five, and it’ll throw off your returns. So make sure you either just include one and say “Hey, this is not including the sales proceeds” or “Hey, this is including the sales proceeds.”

And then the last one is the operating income and cashflow statement. As you see at the top of the data table, there is a section for the members’ return on investment, so the ROI to the LPs for that year. Then it just goes down and lists the profit and loss projections. You’ve got your effective gross income, and your operating expenses; the difference between those two is your net operating income. You’ve got your projected debt service and your projected cap ex reserves, [unintelligible [00:08:13].23] reserves… The difference between the net operating income, debt service and cap ex is your net operating cashflow, and then based on whatever partnership structure you have with your investors, “Hey, here’s how much of that net operating cashflow is going to you.” It’s got that for years one through five, as well as the overall total. Obviously, you’re gonna want that members’ return on investment on that total to equal the total return on investment in your yield projection data table.

If you also remember, in the executive summary there was the sample $100,000 investment return. In this next page it goes into a little more detail on how that was calculated. In the first row it’s got the total distributions to the members, then it does another ROI, which should match the ROI on the previous page, and then it’s got projected profits at sales, which gives you the next row, a total projected return, which is the cashflow plus the sales proceeds. Then you’ve got your return on investment based on the total projected return, and then at the very bottom it just says a snapshot of the cashflow each of those years. The next data table has those return percentages. “Based on the total cashflow, plus the profit at sale, here’s the estimated return on investment, here’s the estimated return on capital/equity investment/equity multiple, and here’s the internal rate of return.”

Then on the next page you’ll see that there’s actually a snapshot of the full proforma. This is essentially the summarization of your underwriting. You’ve got all of your income and all of your expense line items for each year on this data table. For rental income you’ve got your growth potential rent, your loss to lease, you’ve got your concessions, vacancy, employee units, model units, bad debt, and other income, to get you a total income. Then other expenses – you’ve got your payroll, contract service, maintenance, advertising, admin utilities, management fees, taxes, replacement reserves and insurance, to get you  a total expense. Then the difference between the total income and total expense is your net operating income.

For all of these that I just mentioned, if you wanna learn more about how to determine what your proforma number should be, check out the episode about how to underwrite value-add apartment deals. Now, as you’ll see at the bottom of the data table there’s a bunch of small little numbers. On rental income is a 1, on gross potential rent is a 2, on loss to lease is a 3, and then below the data table you’ll see for number 1 through 9 (on this one) it explains how you came up with those assumptions, or just kind of extra notes on that factor.

For example, rental income has got a 1. The assumptions on the sample investment summary says “Unless otherwise noted, based on T-12 at 3% growth.” For growth potential rent “Based on rates they’re achieving and growing at those same rates as renovations occur.” For loss to lease there’s a 3, it says “Currently at 3.8%, but we’re assuming 4.2% year one.” Essentially, just you explaining how you came up with those assumptions. You don’t need to do it for every single one; just anything that’s essentially different. You can kind of make universal comments. For example on rental income and expenses it says “For income, unless otherwise noted, it’s based on the T-12. For all the ones that there’s not a note next to, we base this assumption on the T-12. We’re expecting everything to grow by 3% each year. For expenses, unless otherwise noted, we’re assuming a 2% growth each year.” You get this proforma information from your cashflow calculator.

Now, going back one page to the sample $100,000 investment, unless you actually had that on your cashflow calculator, you’re gonna have to actually do some additional calculations [unintelligible [00:11:55].22] but it’s pretty simple, because on your cashflow calculator it should say “Hey, here’s how much money the LP will be making each year, and then based on the investment, here’s the cash-on-cash return.” As long as you have that cash-on-cash return, then you can easily calculate the distribution based on a sample $100,000 investment. So if the cash-on-cash return year one is 8.9%, 8.9% times $100,000 is $8,900. If year two is 13%, then year two cashflow is $13,000. Then obviously the profit at sale is something that’s outputted as well, so then you add everything together, profit at sale plus all of that cashflow – it gets you a number; then you can divide that number by the initial equity investment to get a percentage. Then multiply that percentage by $100,000.

The only other thing that you might want to include in the financial analysis that I didn’t mention would be a debt summary. You need to put a data table about the debt terms. Again, this is repeated, because you might have had that earlier in the investment summary, but this is gonna be more detailed. You wanna outline the overall debt structure, you wanna say “Okay, here’s the starting loan balance. Here’s how much money we have in the future for renovations. Here’s the interest rate. Here’s the number of interest-only months. Here’s the terms of the loan, here’s the amortization period, here’s the prepayment penalty, here’s the interest rate, the cap, the max interest rate we can have, maybe some refinance information, some supplemental loan information…”, things like that.

After the financial analysis section there’s a market overview. This is gonna be very similar to the offering memorandum, because you’re probably gonna include a lot of the same information that they included in theirs. So definitely use that as a starting point. Now, also remember that you did a pretty detailed market analysis. If you want to listen to that Syndication School series, it is series number 6 and series number 5. You’ve got a lot of data, you’ve found a lot of information about your market, so you’ll want to obviously include that information in this investment summary… But you don’t wanna include a bunch of data tables in here. You mostly wanna have visual graphs; they’re a lot better for the market overview.

For example, here’s some things that you can include… And again, it really depends on the market, but information you can include is does your market appear in any top city in the nation lists? Top city for jobs, top city for living, top schools, things like that. You can look at the status of the current business climate… Again, take a look at some business reports and see where the job growth is, what’s the unemployment, what’s the job diversity… Mention if the apartment community is located near any major highways or transportation hubs, like a train station or a busing route. Mention any nearby mass employment centers, any nearby retail centers… Mention any construction that’s either currently underway or coming in the near future; is there a new retail center, a new apartment/retail center being built? Things like that. Mention any new businesses that have moved to the area recently, talk about the job growth, population growth unemployment reduction, the GDP… Really, anything that’s not related to the actual apartment, but the actual surrounding market, you wanna include in this section. Demographic highlights, things like that.

Take a look at that analysis you did back in series 5 and 6 and then Google, for example, “Dallas Texas business news”, “Dallas Texas job news”, and then also looking at the OM, you should be able to come together with enough information to include.

On the sample document we actually only have one page, but you could probably include  a few pages to highlight that market.

And of course, you’ve got your rent comp and your sales comp section. This is where you want to essentially just include your detailed rent comp data table. And again, we actually provided a free rent comp template during the series about how to underwrite value-add apartment deals, which was series number 14. For that, you’ve got your first data table of all of the rent comps that you used, so include that; you’ve got your subject property, plus rent comps one through ten. It explains “Here’s when they were built, here’s the address, here’s the distance from our property.”

Then you’ve got your detailed rent comp data tables that show the actual rents for all those rent comps. You’ve got your one-bedroom rent comps, your two-bedroom rent comps, your three-bedroom rent comps… Essentially to show that “Hey, here are the comps that we used, here are the rents at those comps; here’s the average rent based on all those comps. Then we took the average rent and multiplied it by the square footage of the same unit type in our property in order to determine what our rental premiums could be… And hey, we even were more conservative and projected a rental premium below that.”

It could be as simple as just including a data table, or you could also have multiple pages where you actually show images of each of the properties to say “Hey, here’s how our property is now, and then here’s all of our comps. Look how much nicer these comps are than the subject property.”

Earlier in the document you might have included a picture of a renovated unit, so your investors know “Okay, the subject property – it’s nice now, but once they perform their renovations, it’s gonna look exactly like this property… And we’re still renting at $50 below. Wow, this is a great deal.” Or you can just leave it as a simple data table… It’s really up to you.

Then you also will want to include some sales comps too, if you want to… But the requirement is you wanna include your rent comps, because earlier you said “Hey, here’s my unit mix, here’s the current market rents and here’s the renovated rents.” Well, how did you come up with those numbers? Boom – detailed data table that explains exactly how you came up with those numbers.

The next section that you’re gonna wanna include in the document is going to be portfolio or case studies. Again, this is gonna be either blank or pretty short if you haven’t done a deal before, but… At this point you’re gonna want to show off your apartment experience. Obviously, if you haven’t done a deal before, then you’re not going to be able to include your own deals, but you might be able to include a deal from your property management company, that they’ve done before; or include a deal that your mentor/consultant/loan guarantor has done. You wanna include something in the case studies.

For Ashcroft, every single deal they’ve done is highlighted in that section. Essentially, each deal has one page. It says “Hey, here’s the deal, and here’s where we’re at” or “Hey, here’s the deal. We sold it. Here’s how much money that we made.” And again, this is to show off your apartment experience.

Also, in this section or in the next section you wanna include information on your team, and obviously on yourself. And at this point, I believe we already made the bios for our teams, which would have been in series 8. And then obviously you have a bio for yourself, that you’ve made for your brand, so you wanna include that information at the end of the investment summary. That will be included in the Appendix. I guess that’s the last part of the investment summary, the Appendix.

There you can include information about your team, and yourself, you can include a section that defines any of the terms you’ve used throughout the presentation – what’s an accredited investor, what is a cap rate, what is cashflow, what’s an internal rate of return, what’s cash-on-cash return, things like that. And that’s it for the investment summary.

Again, you can download the free investment summary template at SyndicationSchool.com or in the show notes of this episode on iTunes, or if you’re listening to it at JoeFairless.com. The majority of what I went over is in that investment summary. But again, I recommend getting your hands on that few example investment summaries; maybe sign up to a few syndicator lists, so that whenever they have a new deal, they send out their investment summaries… And you always wanna be tweaking yours, to make it the best it can be, and making sure that you’re providing all the important information, because eventually you’re going to be doing an investment call, and any information that’s not included in that investment summary will likely come up on the call… And if it’s not in the investment summary, maybe it’s because you forgot, or didn’t even think it needed to be included, and you won’t have an answer… And that’s not gonna be good, if you can’t come up with an answer to an investor’s question. Because if you can’t, then why would they invest with you. It’s showing that you don’t necessarily know everything about that particular deal. We’ll get more into that in a future episode in this series, when we focus on how to conduct that investor call.

That’s gonna conclude part two, and that’s gonna conclude us going over step one of the five-step process for securing investments from your passive investors, which is that investment summary.

In the next episode we’re going to move on to step two, which is how to create that e-mail to your investor database after you’ve created your investment summary. Until then, I recommend listening to part one of this series, as well as the other Syndication School series about the how-to’s of apartment syndications, and download your free investment summary template. All that is at SyndicationSchool.com.

Thank you for listening, and I will talk to you next week.

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