The market has spoken, “It is time to sell.” Many times the decision to sell is up to your investors and you, so you’ll find out how to get the decision made right. Then after it is sold, there are loose ends to tie up and investors to return capital to. They probably can’t wait to put it into your next deal!
- When Is It Time To Sell?
All right, so you think it might be time to re-enter the atmosphere, exit this syndication, pay off your investors, and bring them into your next deal. But how do you decide whether or not it really is time to exit? The reality is, you’re never going to know if you made the best possible call on time. But you can know whether or not you did a good job.
How do you really figure out whether this is the time to sell? And how do you make a case for the investor so that they understand that decision?
You’re going to be making part of this decision based on your knowledge as an expert syndicator. You’re going to be deciding whether you think it makes sense or not. All along, you’ve been keeping track of the property, you’ve been watching, managing the asset. You may or may not have been managing the property as a property manager, but you’ve been looking into it and you’ve been doing everything that you need to do. You also have been looking at the external market to see where you think it fits in in that market. As a result, whether or not it makes sense to you to sell might just intuitively come.
The other pieces that could influence your decision are things like loans coming due. When you put this in this deal together in the very beginning, you had told the investors that you were anticipating a hold period of some number of years. Maybe it was five years, maybe it was seven years, maybe it was 18 years. You’ll want to be consistent with what you told investors, but at the same time you have a duty to convey information to them. Remember, you told them this whole period was just anticipated. And depending on market conditions, it may be longer or shorter.
Let’s look at an actual calculation for how you can decide, which will also inform us on how we need to have communication with our investors in order to do that. We’ll use these example numbers for a very, very simple deal.
In this example, we’re in year five, and our NOI is $180,000. Our financing on our first five years was at 4.5%. And our loan to value was 50%. So that means that over the course of the year that we were paying $83,000 in finance cost, leaving us a cash flow at year five of $96,625. By building a T bar, right, we can build in cash flows. These are accumulating an NOI at about 2% per year. So as just 2% a year increases, we’ve got an anticipated sale at a six cap for $3 million.
We have to pay our loan back. So our distribution is $1.7 million that goes back to the investors. Then we now have an IRR of 12.69%. I probably wouldn’t have done this deal at the outset if I thought I was going to get 12.69% but sometimes you’ll do a syndication and you will get less than you are anticipating anyway.
Our T bar is at 12.69%. So what if instead of selling it at year five, we just refinance it. Our principal has reduced and we now have a loan payoff amount from 1.25 to 1.1. So we’ve decreased that amount and we’ve paid down on that loan by $150,000. And so where are we at in this portion. So now if we refinance it, let’s say we could get a loan at 4%, also a five year loan, which means that we’ve got a financing cost of about $69,000. Then our cash flow this year is now more because our pay back is down considerably. We’re making a lot more money on the deal, now making $110,000 in cash flow a year for distribution.
Now, in our sales price, we’ve increased rent or NOI from 2% to 3%. So at 3%, assuming we could still get a six cap, that’s what we’d anticipate is $3.5 million. This means our cost of sale is higher because it’s worth more and our loan payment is considerably less, because we paid down the principal. Soon we’ll have $2.4 million to distribute. That’s up very considerably, isn’t it? Almost $700,000 to pay back our people.
So this is now a no-brainer, right? Doing the math and figuring out the numbers can help you to see whether the holding you told the investors makes sense or not. There is one extra step here to determine whether you really should hold this property for another five years.
The buy in amount is in exchange for not selling the property. You’re basically buying the property for this amount that you would distribute it for. Then you’ve got your distributions, and then your sales price, plus our distribution amount. Now we have an estimated IRR of 13.43% but we have to hold this property for another five years.
So the question for your investors will be, do you think that it is in their best interest to buy an investment for five years and get an IRR of 13.4%? You know your investors best. Sometimes they’re just happy to keep going and staying with you, especially in regards to paying taxes. Maybe it’s more worth it for them to just stay in a little longer and get that increased IRR. If they were just generally unhappy with the amount that they were getting, then maybe it’s time for them to cut bait and be done with it.
This is the process that we go through when we’re analyzing whether it’s a good time to sell or a bad time to sell. It’s also the same process we look at whether it’s time to create a capital event, like selling off the cell tower, and seeing how those cash flows would play out. Is it giving your investors more money in a good way or not?
Finally, we also have to be thinking about all of this in the framework of taxes, because your investors are going to be paying taxes, unless it’s in some sort of tax protected account, like a self directed IRA.