Key Takeaways:

Transcript

Overview of a Real Syndication Deal Deconstructed

We’re going to take a deeper dive into a deal deconstructed on a syndication deal. It’s a real deal, just slightly modified so that we can hide exactly what the property was for privacy reasons. This will also talk about the fees that you can make and money-making in there. It is a blast from the past, it was recorded about two years ago. And I thought it would be helpful to put out here today. I’m going to be doing that continuously now for some of the videos that I have before, because they’re useful, there’s great content there. And I want to make that available and help y’all. If you like this content, please feel free to subscribe, it would really help me out a lot. And you’ll also get notified when new videos come online.

Here’s what we’re going to be doing today: we’re going to be going back through everything that we talked about last week. Just a quick high-level overview. And then we’re going to go deeper into details such as, how do we underwrite that property? And then once we’ve closed that escrow, how do we make money on it and ultimately sell the property where our money comes from, and we’ll go from there.

Selecting the Property and Entering Escrow

Alright. So here’s my screen. This is what we talked about yesterday, basically, we – and I’m going to do this very, very quick. So we looked at three different properties from a very high level, we looked at them through the lens of our founder investment theory, the underwriting and then survey the investors. We’re gonna go deeper into that underwriting in just a moment. And then ultimately, we came out and at the end of the day, we said, yes, the Wilson building is a property that we would like to syndicate.

So we make that commitment, we put our 3% down. And then this begins this process of where we’re in escrow, we’ve got 90 days to close it, and we’ve got two race cars going at the same time. So we’ve got the race car of the transaction going, that we need to get this closed, and the race car syndicating it, finding investors and making sure that everything is working there.

Running the Transaction and the Syndication in Parallel

On the syndicating side, we formed the entity, we make a choice as to which one of the SEC exceptions we do, we’ll put our PPM together, operating agreement, subscription agreement, start marketing it, build that list, walk our investors, and ultimately, they latch on and give us the money and we close. Meanwhile, we’ve done our financing and our due diligence on that side to make sure we get the money on the loan, in order to get to close. And then we’ll go through the money part of that in just a minute.

Using a Rapid Underwriting Spreadsheet

So let’s go ahead and switch over to my Excel spreadsheet. This is a underwriting template that I have. And this is – I’m gonna be sending this out, there’s – I’m gonna send it out as a tab in a more templated form. So if there’s any comments you have about what you don’t like about it, you know, I’d actually be very interested to hear it.

Alright. So let’s go ahead and let me make it a little bit bigger for people. So this is a underwriting spreadsheet. It starts with some assumptions, and I’ve got a lot of things in it. And not all of these things are filled out. Because this can be really thought of as sort of a back of the envelope calculation.

So it makes assumptions about your income and expense. Your acquisition costs, financing. Ultimately, what the costs of insurance are, how property taxes work… and then you can use this the exact same way by filling in that what the exit looks like.

Why Leases Drive the Entire Underwriting

So the best place, I think to start with everything is what my mentor taught me. And what he taught me was that everything comes from the lease. So the lease is the key of the deal.

So let’s go ahead and put here is the just a quick rent roll that comes from the OM on this property… So I take all of this data here, my lease abstract, and I start just applying it into my spreadsheet.

So you’ll see I’ve basically done that here, I’ve put down the different types of tenants because I want to understand the tenant mix… base rent… other income… CAMs.

Estimating Income, Vacancy, and NOI

Now, I can also use this vacancy if I had a vacancy… So out of this, I’ve got a base rent… And this goes into our NOI…

And it’s always, this is always a game of bouncing back and forth between what is what you can do, how you can get the numbers to be the way that you want them to, without lying, but ways of saying what are those levers that I need to pull in order to change the investment.

So all we’ve done… is we’re just taking the potential rental income… times 12… subtracting vacancy and credit loss… adding other income… and arriving at gross operating income.

Operating Expenses and Cash Flow Before Taxes

So then we come to our operating expenses… At the end of the day, we’ve got $81,000, which is 24% margin… and then we have a net operating income of 262,924.

Now… we need to figure out okay, so we’ve got all that now, what is how much money is actually coming in.

So as a very quick refresher… everything that takes place above the line… comes to NOI… below the line are discretionary… debt service, leasing commissions, capex, reserves, asset management fees…

So at the end of the day… you get your cash flow before taxes.

Investor Returns, Shares, and IRR

So… you’re offering this 1237 shares… I almost always encourage people to do the dollars per share at $1,000 a share…

So the number of offered shares is 1237… This is your estimate… annual distribution… cash flow before taxes… cost per share…

So that is 6.29%.

Your internal rate of return… depends on disposition… sales price… cap rate compression… costs of sale… loan payoff… funded reserves…

So… we caught an error… and that highlights exactly part of the process itself… you may have decided I want really I want to get 15%… and so I need to find a way to improve it.

Using Financial Levers to Improve Returns

So how can we do that?… increase income… reduce costs… adjust fees… reduce shares…

So… maybe I pump back part of my fees into the deal… reduce total cost… improve IRR…

Alright, I probably can accept that.

Syndicator Compensation and Ongoing Cash Flow

Now this is part of our profit… brokerage fee… asset management fee… ownership distributions…

So every 12 months… we are going to be getting this money… and it’s increasing…

At the time of sale… we also have money coming in… brokerage fee… disposition proceeds…

Net Present Value and Syndicator Time Value

Now why do we do net present value?… to see if it’s worth our time… If my net present value is approaching zero, I need to really think long and hard…

Basically… this is a property that you’re going to make a lot of money on… investors likely 15–17%…

Post-Closing Asset Management and Investor Reporting

Alright, so let’s go ahead and talk about another portion of this… we’ve closed the property… and now we’ve promised investors a few things.

So, promise… monthly distributions… reporting…

Every month… you are sending them a report… pictures… cash flow summary… occupancy… reserves… performance metrics…

So I’m sending them this email every month… your investors will always know what’s going on…

Value-Add Strategies and Exit Decisions

At the same time… we are always looking at the three options: hold, refinance, or sell… value-add opportunities…

Selling a cell tower or billboard early… returning capital sooner… increases IRR…

So that is another portion… changing tenants… upping rents…

Voting, Selling, and Final Distributions

Ultimately… you decide it’s time to sell… investors vote… templates for voting…

Yes, you can take brokerage fees… as long as it’s disclosed in the PPM…

You market… choose a buyer… close…

Then you finalize… pay final expenses… distribute proceeds… give a final report… close the entity…

And that is the basic property process of what we do.

I will also include the quick spreadsheets… for calculating distributions and final dispositions.