JF1779: How to Close on an Apartment Syndication Deal Part 1 of 2 | Syndication School with Theo Hicks
We have gone through many steps of the apartment syndication process. If you’re following along, you should be excited to finally discuss how you actually close on an apartment syndication deal. Theo will review a lot of the content that has helped us get to this point in this episode. On the next episode he gets more into the actual closing, with asset management starting next week. 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 am your host, Theo Hicks.
Each week we air two podcast episodes, every Wednesday and Thursday, that are typically 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, template, some sort of resource for you to download for free. All these free documents, as well as the past Syndication School series, can be found at SyndicationSchool.com.
This episode is part one of a new series. It’s gonna be a quick two-part series, so today and tomorrow – or for those listening to this in the future, this episode and the episode directly following this one… And we are going to be talking about how to close on an apartment syndication deal.
By the end of this episode you will learn 1) what you need to do before you actually close on the deal, and then we’re going to quickly walk through what to expect during the closing process, because the closing process for an apartment syndication deal is slightly different than your typical residential closing.
Then tomorrow, or in the next episode, we’re going to talk about the other aspect of the closing, which is you notifying your investors about a successful close, and what to include in that email notification.
The three things you need to do before closing – and these are three things that we’ve covered in extreme detail in past Syndication School series… In series 18 we discussed the due diligence reports; so what you wanna do before you close is to confirm your budget. Confirm the accuracy of your rent premiums after you’ve done your value-add renovations, confirm your other income items like the loss to lease, the vacancy, any concessions you expect to give, other income… And then on the expense side you wanna confirm all of your expenses – maintenance, repairs, contract services, payroll, admin, things like that.
And in order to confirm those things, if you remember, after you put the property under contract you did your due diligence. So we talked about ten due diligence reports in particular that you want to obtain, and you will use those reports to essentially confirm your budget.
Also included in your budget besides those ongoing income and expenses will be the upfront costs associated with your value-add business plan. Those are your exterior and your interior renovations. One of the reports helps you determine exactly what you’re going to need to do from an exterior perspective maintenance-wise, and in addition to that, any upgrades that you wanna do – clubhouse, new playground, upgrade the fitness center, things like that.
Then you also had a report where your property management company actually walked every single unit and determined what you need to do from a deferred maintenance perspective to every single unit, as well as what you need to do from a value-add perspective for each of your units. So if there were any deferred maintenance items you need to address, you’ll know what those are from your due diligence, and then you will know exactly what units need to have what done in terms of an upgrade perspective.
For example, maybe only half of the units need new appliances, maybe 75% need new floors… Whereas during your underwriting you might have assumed that you need to do new appliances, new floors, new cabinets to every single unit. So you might have actually had been able to reduce your budget at this point in time. Same thing applies to exteriors, same thing applies to your expenses, incomes… Those might be the exact same as they were during the underwriting, but most likely you had at least some minor adjustments to those numbers.
And of course, you’re gonna work with your property management company as well, because obviously, they’re gonna be the ones who are managing the property on an ongoing basis. So you want to confirm that they can operate the property at those expenses. If they’re the ones that will be performing – or at least managing – the renovations, you need to make sure that 1) they approve your renovation budget, and 2) they approve your renovation timeline. If you wanna get the renovations done in 12 months, then you tell that to your property management company and they’ll let you know that “Hey, maybe we can do it in 18 (or 16) months.”
All these things are gonna affect your model, and anything that affects your model is gonna affect your returns. So you’ll wanna know upfront if your returns are gonna go up, which is an amazing thing, because you’re gonna let your investors know about that. If the returns are going down, you wanna know how much and if you need to adjust that offer price, or maybe pursue a different type of financing prior to closing… Or if you need to back out of the deal entirely.
That brings us to the second thing you need to be doing, which is to secure financing. That is going to be series number 16, where we took a deep dive into the types of debt you can secure on apartment buildings when you’re doing an apartment syndication. At this point in the process you should have selected your loan, and then you should have gone through the entire process of applying and being qualified for that loan, and the last step is actually to sign on the dotted line, which we will discuss here in a little bit.
Essentially, you need to be knowledgeable of the loan programs, having been talking to your mortgage broker or the lender, letting them know what your business plan is, sending them your budget, and they will go ahead and underwrite that deal for you and let you know exactly how much money they can lend on that property… And then let you know exactly how much money you need to bring as a down payment for that property, which comes with the third thing you should have done prior to this point, closing, which is to secure commitments, which is series number 18. I think the due diligence is series 17, securing commitments is actually series 18.
At this point you should have 100% of the funds required to close raised from your passive investors. Not only raised, but those funds should have already been wired as well. And in that series we discuss exactly how to determine how much money you need to raise. It’s actually not just the down payment for the loan. You might need to raise extra money for closing costs. You’re probably gonna have an operating account fund for anything unexpected that comes up in the first 6-12 months of the business plan. Maybe if you’re charging some sort of acquisition fee, or a guarantee fee; you’re gonna want to raise that capital as well.
Also, the upfront due diligence costs – you’re gonna want to potentially raise capital for that, or you might be taking money out of your own pocket to pay for that, and then raising that capital from the investors to reimburse yourself at close.
And then also, you’re going to want to have all of the legal documents – the PPMs, the operating agreements – signed by any and all general partners, and any and all limited partners. As long as all three of those things are completed, then you are ready to close on the deal. You’ve reached the finished line… Or should I say the first finish line, because once you’re closing the deal, in a sense the real work actually begins – the asset management, which we’ll begin discussing next week, or in the series after this one.
Ideally, you know exactly what will happen during the closing process, because your lender or your mortgage broker has walked you through that process, or maybe a real estate broker has walked you through that process.
As I mentioned, closing on an apartment syndication deal is a little bit different than you traditional residential closing, because in your traditional residential closing you show up, you sit there for two hours, signing a bunch of documents, and then you get the keys and you kind of take over the property. For the actual apartment syndication closing, a lot of the work actually is completed a few days prior to closing. What happens is three days before closing, you (the sponsor) will sign the loan, and you’ll sign the title documents to approve that loan, as well as approve the transfer of title. Then you will go ahead and send that information back, and then they’ll mess around with that for a day, and then a day before closing you’re gonna receive all of the closing documents from the lender. So rather than signing the closing documents at the closing table, you will get those the day before, mailed to you, because the property might not even be in the state that you live in.
You will most likely have to go to a notary and sign all those documents in front of a notary, and then maybe go to a FedEx or UPS, so you don’t have to go to multiple places, because you’re gonna wanna overnight those documents back to the lender or the title company, whoever’s handling the closing.
You will also need to wire any of the funds that are required to close into escrow, with your lender, at that time, as well. So you’re gonna do that before the actual closing date… At which point the lender is going to review the documents, make sure that you sign in all the right spots, all the verbiage is correct, nothing is missing, make sure that all the money is there before they actually transfer it to the title company, and then they will also issue a new deed in the name of your LLC. So again, you’re most likely going to create an LLC that you are a general partner of, and that the limited partners are investors of, they own shares of. We discussed that in the previous Syndication School series about securing commitments, which is series number 18.
So then the next day after all that is done, once [unintelligible [00:12:02].24] the lender will be dotting the i’s, crossing the t’s on the day of closing, and then assuming everything is good to go, they’ll send the money off to the title company, who can then send it to the actual seller, and the property is yours.
Once you receive the word that you’ve got the go-ahead, that the closing is completed, then the first thing you’re gonna want to do is send out an email to your team – which includes your property management company – and let them know that they can take over the property. Even better, you can tell your property management company that “Hey, we expect to close between 4 and 5 PM Eastern Standard Time, so I want you guys to get there at [3:45] PM, in the parking, so the second I send you that email you can instantaneously take over management of that property.” That way not a single second is wasted, and you are able to begin implementing your business plan from not only day one, but second one; millisecond one, if you’re really fast.
So unless you are using the old property management company, which you probably shouldn’t do, unless they’re the main management company in that area and you’ve decided to use them after an interview – you don’t wanna just automatically use the old property management company just because it seems like it will make for a smoother transition. That may be the case, but that doesn’t necessarily mean that on an ongoing basis that’s the best idea.
So if you are using – which is the majority of the time – a new management company who needs to go in there and actually take over, the old management company should know that the property is being sold on this day, and that they should expect the new management company to show up between 4 and 5 EST. If this is the case, there shouldn’t really be any resistance, or them standing there with picket signs and a fence, not letting the new management company in.
Property managers usually know each other, so it’s likely that the old management company and the new management company actually know each other, or are at least familiar with each other. But on the off chance that the old managers either don’t know that the property is sold, or maybe they’re not friendly with that management company, or maybe there’s some bad blood between those two companies, or maybe they’re just annoyed and disgruntled that they’re losing the business – that might happen, but as long as your property management company is experienced, which means they have experienced doing transitions before, they should be able to handle any resistance and make sure that they’re able to get into that property that day.
So from there, the property is yours, and at that point you will transition from – if this is your first deal – not owning any deals at all, and kind of just being someone who’s really good at underwriting, to now actually being the asset manager of a property. As I mentioned, we’re going to discuss the asset management responsibilities starting next week.
There might be a few other things you need to do before closing, but that’s just kind of the general overview of what to expect… So the things you need to do prior to close, and then three days before closing, a day before closing, and then the day of closing, how to handle the transition. Again, there might be a few other things you need to do based off of maybe you’re doing some sort of special loan, or other circumstances… But in general, that’s what’s going to happen.
Now, the other thing that you wanna do before you actually close is you want to draft your email to your passive investors… So that the second you close not only do you notify your property management company, so that they can take over, but you also let your investors know that you successfully closed, as well. That is going to be the topic of tomorrow’s (or the next) episode.
This was a quick one, the series itself will be pretty quick – just a two-partner – before we move on to the asset management duties, because the closing process isn’t that complicated, and there’s really not much else to say than what I have said in this episode so far.
In this episode we learned the three things you need to do before closing, which is 1) confirm your budget via that due diligence, as well as your property management company. 2) Secure commitments from your passive investors, which requires having the funds and having the legal documents signed, and then 3) making sure that you’ve completed the loan application process for whatever type of financing you plan on securing on that asset.
In part two, again, we’re gonna discuss how you notify your passive investors about your successful close. Until then, I recommend listening to those three series – 16, 17 and 18 – as well as the other 15 series we’ve done so far (I can’t believe we’ve done that many series) on the how-to’s of apartment syndications. Also check out all the free documents we’ve given away so far. The next free document will be in tomorrow’s episode, so make sure you tune in tomorrow to get that free document and learn what it is. All of those can be found at SyndicationSchool.com.
Thank you for listening, and I will talk to you tomorrow.Follow Me: