How to Close on an Apartment Syndication Deal
Closing an apartment syndication deal is different from closing a traditional multifamily residential property. Even so, it’s nothing to feel stressed about. Instead, if you approach it methodically, it should be a painless process, and it’ll position you for long-term success.
Below are the major steps that such a real estate closing requires.
Conducting a Total Financial Analysis
First of all, go over your entire budget. Make sure your rent premiums are accurate. Verify your continuing revenue streams. Review your ongoing expenses: payroll, repairs, and so on. And don’t forget upfront costs such as renovations and upgrades.
You can use your due diligence reports, which you filled out when your new property was under contract, to help you complete this top-to-bottom financial review.
Similarly, look at your property management company’s report, the document that lists each unit’s deferred maintenance projects. Some of those residences might need new flooring, cabinets, or appliances. Most likely, these numbers will be somewhat different from what your underwriting indicated.
Confer with your property management company as well. Those pros can approve or adjust your renovations budget and schedule.
When you’ve finished this review, you may need to alter your business model to an extent. Share those changes with your investors. Of course, if you’re now projecting higher returns, everyone should be happy.
Don’t panic if you’re looking at lower returns. You may have to adjust the price you’re offering for the property. Or you could try to locate extra financing. However, if you’re facing significantly lower returns, it might be wise to retract your offer altogether.
Sending the Money and Legal Documents
By now, you should have found, applied for, and qualified for a loan. And you should’ve raised and collected all the passive investments you’ll need, enough to cover the loan’s down payment, the closing costs, and an operating account for the first several months of ownership.
Likewise, if you charged an acquisition fee or any other fees, that money should have come in. Plus, if you’re not paying them yourself, you might want to raise funds for your due diligence expenses.
In addition, at this stage, all of your operating agreements and other legal documents should have been signed by all of your general and limited partners. And you should have all those forms in your possession.
A few days before you close, you’ll sign your loan and title documents. Those signings will probably take place in front of a notary. You’ll then ship those forms to the title company or your lender. Plus, you’ll deposit any closing funds into your lender’s escrow account.
If a lending institution is involved, it will review the documents and funding before transferring the money to the title company.
The title company will send the money to the property’s owner and issue the deed to the LLC you’ve set up. At last, the deal will close, and you’ll be the property’s new owner.
Emailing Your Team
The moment you learn the apartment syndication deal has closed, notify your real estate investors and property management company. Indeed, you should draft this email a few days in advance.
Sending this email isn’t a matter of politeness. It’s actually your first official duty as the new multifamily property owner.
In fact, you could email the people at your property management company ahead of time, predicting the hour that the closing will go through. That way, they can be sitting in the parking lot when the closing email arrives, ready to spring into action.
Incidentally, you might be employing the old management company, in which case the staff will already be set up for the transition. Keep in mind, though, that unless that old company is truly outstanding, it’s probably a better idea to start fresh with your own managers.
In any event, here’s how you could format this email:
1. Share the Big News
State that you’ve closed on the property and congratulate everyone.
Proceed to tell your recipients that the closing documents have been signed, and you or your property managers now possess the keys.
2. Set Communication Expectations
Explain how you intend to stay in communication with the entire group: how you’ll contact them, how often, and what those messages will entail. Also, can they expect your updates on certain days — the first day of each month, for example?
Each update will review all the operational and financial changes since the previous update. You could email your group newsletters, hold conference calls, mail business documents, or decide on some combination thereof.
During the first year, you’ll likely be in touch with everyone more frequently, perhaps every week or every other week. That’s because so many things will happen in those first 12 months: renovations, new leases, residential turnovers, and so forth.
As things settle into a routine, however, you can contact your group less often: maybe once a month, once a quarter, or even once a year.
3. Set Financial Expectations
List your monthly, quarterly, and yearly financial expectations for this property.
4. Share a Financial Document
Provide a link to a financial document, which will contain information about distributions and taxes.
Specifically, it will tell the group how often you’ll send distributions, when the first distribution will arrive, and how that money will be paid. Can the investors choose their own payment methods?
Furthermore, what’s the amount of that first distribution, and what will the amounts of subsequent distributions be?
Those sums will likely equal the prorated preferred return divided by 12 and then multiplied by the amount of each person’s investment.
Also, will the distributions always be equal? It’s likely that, if you exceed your financial projections one year, you’ll send larger distributions at year’s end.
As far as the tax info, this document will tell everyone which tax documents you’ll send out each year. The K-1 form will be among them.
If you’re not sure how to format this financial document, you could hire a freelance designer online for an especially crisp and attractive style.
5. Be Positive
It’s great to include a few positive statistics or news stories as well. For instance, you could provide data about the robust local demand for apartments. Other examples include low unemployment numbers for your area, high job growth stats, or links to articles about businesses that just opened. These items should lift everyone’s spirit.
6. Sign Off
You could close this email by sharing your own enthusiasm for the deal. Encourage the group members to contact you with their questions, too.
Finally, before you send this crucial email, quickly reread it to make sure everything’s correct. Once you hit the send button, your apartment syndication deal will be complete. You’ll instantly become an asset manager. Why not take a moment to celebrate? Then let the asset managing begin!
Disclaimer: 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.