Apartment
Syndications & Syndicates - Commercial Real Estate Development Finance
Investing...
Commercial real
estate development investing - and apartment syndicates and syndications in
particular - offers the investing-public and project developers a convenient
forum to 
match capital to opportunity. Most apartment syndicates in the
past have been geared towards low-yield 1031 tax-free exchange investors because
the terms of those syndications was being drowned out by the thunder of the herd
each time a new syndication was announced. It's difficult for the average
investor to understand the ins and outs of commercial real estate investing via
the fractional tenants-in-common commercial real estate ownership. This
isn't like investing in the stock markets - issues can't totally devalue
overnight. But there are other issues that need to be considered such as
who will be responsible for the payment of the property taxes, insurance and
maintenance associated with owning a fractional
tenants-in-common plan (also called a "TIC Plan" - as in
"tick").
TIC
plans are used to provide cash to a project. The savvy developer uses the
cash from a TIC
plan real estate syndication to augment and/or replace the developer's
equity investment in the project. Here's a scenario that will demonstrate
the efficacy of this approach.
Project:
300 Unit Class "B" Rental Multifamily
Cost:
$100,000 Per Unit - $30,000,000 Total
Prime
Mortgage: $24,000,000
Equity
Required: $6,000,000
If
you seek to raise the funds via a private placement offering, odds are you are
going to be giving up at least 50% of the deal, if not 75% of the deal in order
to raise the $6,000,000. The costs associated with the preparation and
marketing of the private placement offering would be around $200,000. So
you are going to spend $200,000 of your money to end up with less than 50% of
the deal. Doesn't make a lot of sense, now does it?
On
the other hand, a real estate syndication for the apartment project may make
more sense. The units are sold to the investors for $75,000, so 80 units;
or, 26.67% of the total inventory. The business deal is a yield of 20% per
annum for 7 years, so the total amount of the contract - the "stated
yield" - is 140%, or some $105,000 per unit. Over the seven years,
the units increase in value by an average of 3.5% per annum (year over year)
which means each unit will be worth roughly $127,00 each, or $38,160,000 in
total. The developer will owe something less than $24,000,000 on the
mortgage, but we will assume it is an interest-only for the sake of
simplicity. This means the total equity in the project is approximately
$14,160,000. If we further assume the developer makes no payments to the
investors over the course of the intervening years, then the investors will be
owed $8,400,000 out of the $14,160,000 in total equity. This means a
refinancing having a LTV ratio of at least 85% is required in order to pay out
all investors 100% and give the property over to the developer as the sole owner
and with a close-out of the real estate syndicate. Everyone wins.
To
find out how a winning strategy and program can be put together for your
company's benefit, contact a Rainmaker consultant today.
