JF1780: How to Close on an Apartment Syndication Deal Part 2 of 2 | Syndication School with Theo Hicks
Theo continues the talk about the apartment syndication closing process. We’ll move into how to notify your passive investors after you close. Next week will start asset management. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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“You’ll want to draft the ‘congrats we closed’ email a few days ahead of time”
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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 – as well as two videos now – that are 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 that you can download for free, that accompanies that series. All of these documents, as well as the past and future Syndication School series, can be found at SyndicationSchool.com.
This episode is going to wrap up a two-part series. This is part two of the series entitled “How to close on an apartment syndication deal.” So if you haven’t done so already, listen to part one, where you learned about the three things you need to do before closing, so really just a summary of the last three series that we did. As a refresher, those three things are 1) confirm your interior and exterior renovation budget, as well as your income and expense budget. Those are based on the due diligence reports, as well as conversations with your property management company. That’s series 17. 2) Secure the commitments from your passive investors, making sure all funds are wired and all legal documents are signed. That’s series 18. And then 3) is to make sure that you’ve secured the financing from your lender. Make sure that you’ve gone through that entire loan application process, everything is approved, and all you need to do is sign on the dotted line, which is series number 16.
Then we also walked through what to expect during the actual closing process, and we mentioned how it’s a little bit different than the residential, because you’re gonna go ahead and sign some documents three days before closing, and then sign one more document the day before closing, and then the day of closing all you really do is sit and wait for that notification from your lender, letting you know that the property is now yours.
At this point, the next thing that you wanna do is send out an email to notify your passive investors of the closing… Which is technically your first official duty as the asset manager of your newly acquired apartment community. Congratulations! In fact, you want to maybe title – this is how we title ours – “Congrats, we’ve closed!” We’re gonna call this the “Congrats, we’ve closed!” email for the remainder of this episode.
You’re actually gonna want to draft this email a few days before the scheduled closing date. That way, the second you receive notifications from your lender not only can your management company take over management immediately, but you can also send out the closing email to your investors, so they know within a few minutes of you knowing that the deal has closed. Then at this point you can celebrate however you see fit.
The purpose of this email is going to not just be to let your investors know that you closed – because you can just say “Hey, we closed”, and then that’s it. No, we always want to provide our investors with extra pieces of information whenever we are contacting them in any way. So you let them know that you closed, but you’ll also want to at this point set expectations for the process going forward… So what should they expect each month, each quarter, each year.
As I mentioned, a few days before closing you wanna create this email. You should have all the information you need before you actually close. You might need to tweak a few things if the closing date gets delayed a little bit, but in general you should be able to create this entire email and draft it before you actually close on the deal.
In the first sentence you’re going to want to mention “Congratulations! We’ve closed on XYZ property.” Then in the next sentence you’re gonna want to include information about the fact that you’ve already taken ownership of this property, so the closing documents have been signed; the abstracted keys are in your hands – or really in your property management company’s hands; they’re probably in a lockbox, in the clubhouse that they’ve approached – and that your management company has already taken over operations to the property. That’s one of the advantages of having your property management company waiting in the parking lot – you know that once you let them know, within a few minutes the property is in their hands. So that’s what you wanna put in the next sentence… Obviously, wording it as if it already happened, even though you’re writing this a few days before this actually happened.
Then next you’re gonna want to set up expectations for ongoing communication. Things to think about and information to include in these next few sentences is how often you plan on providing your investors with updates. Are they going to get weekly updates, monthly updates, quarterly updates, annual updates? Will the frequency of updates change, depending on where you’re at in the business plan?
One thing you do is send out weekly or bi-weekly updates during the first year, just because you’ve got a lot going on; a lot of capital improvement projects are happening, a lot of units are being turned over, new leases signed, renovations done to units… So you might have enough information to do weekly or bi-weekly emails. Then once the major renovations are done, you might move to monthly, and then after all the interiors are done, maybe you just start doing quarterly updates. Or maybe you just do annual updates. It’s really up to you.
Joe’s company sends out updates each month. In these updates he recaps the previous month’s operations. We’ll go over in more detail about these recap emails in the next series, where we’ll talk about the actual asset management duties… But again, do let them know what you plan on sending them.
We send them the previous month’s operations, plus on a quarterly basis we send them the financials. We send them the actual profit and loss statement, and we sent them a current rent roll for that quarter.
For you, the frequency of these recap emails and the type of information that you include in these emails is really gonna be up to you, based on your business plan and the preferences of your investors. You can send exactly what we send, you can send more, or you can send less… Again, that’s gonna be up to you. But whatever you do, you want to let your investors know upfront, and then make sure you’re adhering to those expectations throughout the business plan.
Next you’re going to want to also include some additional information about their distributions, about the taxes, and anything else that’s gonna be relevant to your investors. Now, you could technically include this in the email if you want to, but we actually have a separate document that we link to in our closing email, just so the email is as succinct as possible, and doesn’t have a lot of bullet points and data tables and things like that. So we actually have a link that you click, and you can download the investor guide.
We’re going to provide you — if you’re listening to this episode, the free document this week is going to be a free investor guide template. It’s the actual investor guide template that Joe has used on previous deals.
So after you include the information I’ve mentioned before, you can say something like “For additional information on distributions, tax timings etc. click here to download our investor guide”, and then you can leave it at that. Click on the investor guide and then you will have a PDF that hopefully (ideally) is one page long, that includes all the additional information on the distributions, on the tax timing and really anything else.
The purpose of this investor guide is to essentially proactively address any questions that your investors are gonna have about the deal process… So more information about ongoing communication and updates, tax information, distribution information, and any other relevant piece of information that your investors might ask you a question about… Because if you have 100 investors and you send out an email that just says “Hey, we closed. Congratulations! Can’t wait to work with you” and that’s it, well they might ask you “When do I get my first distribution? When do I get my K-1? When am I gonna be receiving updates about the deal? When am I gonna hear from you next? What information will those updates include?” So rather than having to answer hundreds of emails, just think of anything that your investors might ask, and make sure you include that in this investor guide.
You’ll see how our investor guide is formatted and the types of information that we include, but overall, here are some things that you’re gonna want to think about including in your investor guide. From a communications perspective – and again, some of this might be a repeat of what you’ve had earlier in the email, which is totally fine… Saying something twice is better than not saying it at all. So the first thing could be “How often do we provide those updates?” Again – monthly, quarterly, weekly, or it will change throughout the business plan.
Next, what form will they receive these updates in? Are they gonna get an email each month? Will there be a conference call they can dial into? Will it be some sort of mail document or mail newsletter, or will it be something else?
Next, what will these updates include? You can explain to them “We’re gonna send you updates each month, it’s gonna be an email, and it’s gonna include XYZ.”
Next, will you be sending them detailed financial statements or other financial or operational reports? If so, what and when will they receive those? And how will they receive those?
And then lastly, when should they expect to receive their first update? Will they receive an update in 30 days? Will it be by the same day every single month? We send our updates by the 14th of every single month. So if you close on the 31st of July, then we would send out our first update on the 14th of August.
That concludes the types of communication-related information you want to include in the investor guide. Next is tax information. What type of tax documentation are you going to provide them? Generally – this is kind of your standard apartment syndication deal – you’re gonna want to send your investors a K-1 tax document, which outlines the annual distributions that were received by each investor, as well as any depreciation. We discuss how to do this again when we start discussing asset management duties, how to send out these K-1’s.
And then when will you send these K-1’s out by? Or whatever tax documentation you send out. Obviously, tax day is April 14th, so it should be before April 14th, just so they can complete their taxes on time.
Next – and this is probably what the investors care about most – is the distribution information, so how do they make their money. How often will you send distributions? Is it gonna be monthly, quarterly, or annually, or some other frequency? When will they receive their first distribution? Will they receive it within 30 days, at the end of the next month? Typically, what we do is we will send it out about 30 days after closing, or more. Let’s say we close on a property on July 15th. The first distribution will be sent out at the end of September. It’s going to include July 15th through 31st, plus all of August. Or it will be sent out at the end of August and just include the time that property was owned in July. It really depends. If we close on the 30th, we’re not gonna send out one day’s worth of distributions at the end of the month.
Usually, you will receive the distribution for the previous month at the end of the next month. So you’ll receive August’s distribution at the end of September, September’s distribution at the end of October etc.
For you it can be whatever you want. Likely, it’s going to be based on what your property management company can do… But it’s gonna be difficult to do August’s distribution at the end of August, because you might not have all that money collected yet.
Next, what will be the amount of their first distribution? Most likely it’s gonna be prorated based on whenever you bought the property. If you closed July 15th, then the first distribution, if it’s covering just July, will be 15 days’ worth of that preferred return. So 8% divided by 12 months, divided by those days, multiplied by 15.
Another thing you wanna include is what is the distribution amount after that first distribution, which is most likely going to be just that prorated preferred return. So whatever the preferred return is, divided by 12 months, times whatever their investment was.
Also, will every distribution be the same, or will you distribute more at the end of each year? Generally, you’ve got your preferred return, and then you’ve got that profit split after the preferred return. So what we do is we will go ahead and distribute 8%, no matter how well the property performs. Then at the end of the year we will evaluate the returns; so after 12 months we’ll be like “Okay, well the property actually cash-flowed 10%”, so we’re gonna go ahead and distribute an extra 1.5% to our investors… So in that 12-month recap email you just say “Hey, the property performed above our expectations. We projected an 8.5% return year one, but we actually had 10.5%, so rather than getting an extra 0.5%, you’re gonna get an extra 1.5% at the end of the year.”
Most likely, the end of the year distributions are gonna be higher regardless. Ideally, you’ve exceeded expectations so that you’re able to distribute more than you actually projected.
And then also you wanna include information on how they’ll actually receive their distributions. Is it check in the mail, is it direct deposit? Typically, this is something that would have been set up prior to closing. And then typically what you wanna do is you wanna include a clause/disclaimer that says “Hey, if you decided you wanted a check, or decided you wanted a direct deposit prior to closing and then you changed your mind, please give us one distribution cycle for those changes to come into effect.”
Now, one more note about this investor guide – the one that we send you is really a standard Word document. It’s not the one that we actually use now. The information is included, but the look of it is different… Because we actually have ours designed, we’ve got our logo at the top, the formatting is a little bit different; you’ve got some designs at the bottom.
You might wanna consider going to a place like Upwork.com and hiring some contractor to actually create a design for you. Send them a template – you can even send them our template – and then ask them to design it based on maybe a logo you provided them, and three color schemes you provided them. Or you can just use our standard Word document. It’s really up to you. At the end of the day it’s really about the information included, but sometimes people like to see things that are a little bit more aesthetically pleasing.
So that’s the second to last thing you’ll want to include in that “Congrats, we’ve closed!” email. The last thing you wanna include is a bullet point or paragraph that references some sort of market-related update or business-related update since you’ve closed. This could be the market is in some sort of top markets list, best places to live, best places for jobs… It could be something about the city had the highest job growth in the nation, the lowest unemployment in the nation, the highest rent in the nation… Things like that. It could be about a business or a Fortune 500 company that’s moving into the area, it could be about a Fortune 500 company who’s expanding through the area… Something that reinforces your thoughts on the strength of the market.
So you’re gonna say “In related news, ABC Tool, which is number ten on the Fortune 500 company list, recently announced that they are expanding into this area. It should bring 500 new jobs over the next 3-4 years. They’re investing one billion dollars in a new facility. This reinforces our thoughts on the ongoing strength of this market.
Then you can conclude the email by saying “Looking forward to this being a successful deal. If you have any questions, please let me know by replying to this email.” If you want to, you can provide your phone number as well, if you want them to call you.
So make sure you have this email drafted prior to closing, so that the second you close you can go ahead and click Send on that email, of course double-checking one more time that all the information is correct… Especially if the closing date got pushed back a few days, you’re gonna want to update the dates in your investor guide.
From there, once you hit Send, you’ve officially started off as an asset manager by notifying investors of a deal you’ve closed on. The next step is to manage the business plan until you sell. So the next chunk is going to be from the time that you close to the time that you sell the property. That’s gonna be when you’re the asset manager. So the next series is gonna go over in detail exactly what you need to do as an asset manager. It’s probably gonna be a very, very long series, so I might not even give it a length at first, because it’s probably gonna be at least eight parts, possibly ten parts… Because there’s a lot to cover, there’s a lot of things that you’re going to need to do in order to ensure the successful implementation of your business plan.
In the meantime, you can listen to part one, where we talked about, again, those three things you need to do before closing, as well as the closing process. Also, listen to the other Syndication School series, that take you all the way from being a complete newb to closing on your first deal. Make sure you download the free investor guide document. All of these can be found at SyndicationSchool.com.
Thank you for listening, and I will talk to you next week.