Timeline

Each syndication goes through a basic progression. We review five typical phases for a value-add asset to give you a general idea of what to expect.

Not all business plans follow this progression, but this is fairly common series of events that happens on the general partnership side of things. Nevertheless, the deal sponsor should have a clear plan that you can review.

Phase 1: Acquisition

This is arguably the most difficult and time consuming phase but it sets the stage for a good deal if a competent sponsorship team is involved.

Finding the property

Here the sponsorship team is tasked with finding a value-add property in a growing market at the right price. Not only is this quite a hurdle but they’re most likely facing a competitive offer situation. Cultivating relationships with brokers in their markets are important as they can get access to the best deals. Underwriting skills are necessary to determine quickly and accurately if a deal is worth pursuing. Relationships with lenders and property managers are also essential since they will be able to verify if the underwriting will be able to achieve the target projections. It’s vital to have the right team in place for getting the right property under contract.

Performing due diligence

After the deal is under contract, the due diligence begins. This is an incredibly detailed process of reviewing financial statements, bank statements, invoices, rent rolls, tax documents, insurance documents, etc. They also have to perform a physical inspection of the property and every unit. With the information gathered, the sponsors will fine tune their assumptions and adjust the business plan to meet the target projections.

Finding investors

Once the deal looks solid, the sponsor will open the investment opportunity to potential investors. This will be in the form of a new deal alert (if you’ve signed up for those) and should include an investment summary. A webinar will follow where the deal is covered in more detail and where you have a chance to ask questions.

Phase II: Repositioning

This is the part where the value is added. Often, the business plan calls for various changes to the property and operations right out of the gate after closing.

Several ways to accomplish this are to hire a new property manager, reduce expenses, contract with new vendors, begin exterior and interior updates, common area property upgrades, unit renovations, etc.

Unit renovations and property upgrades (that may include adding playgrounds, dog parks, covered parking, updating lighting and signage, freshening up landscaping, replacing roofs) can take from a few months up to a few years, all depending on the scope of work. Upgrades to the units start with the vacant ones, then as leases expire the tenants would have the opportunity to move into the freshly renovated units. Those vacated units will then be updated, and so on, until all are complete.

Phase III: Refinance

Once the targets in the business plan come to fruition and the property is increasing the net operating income (NOI) substantially, value has successfully been added to the asset. It’s time to refinance.

How commercial assets are valued

Let’s compare apartment building and self storage assets to single family homes.

The value of single family homes are dependent on comps (the sell price of other single family homes that have sold recently in the area). The worth of the home won’t be much more than a comparable home in the area no matter how much money you put into renovations.

However, the valuation of a commercial asset is based on how much revenue the asset generates. Every additional dollar of rent and every dollar of decreased expenses contribute to the value of the property. In the case of value-add multifamily property, the renovated units are able to fetch a rent premium. For example, if an older unit was rented for $800, an updated unit could rent for $900.

This $100 may not seem like much, but let’s do the math. The additional $100 per month equals $1,200 per year for a single unit. If the property has 100 units, that's an additional $120,000 per year in rental income. When you work in some underwriting and cap rate valuation, that $120,000 per year in additional revenue could equate to roughly $1,200,000 in additional value.

Ripe for refinance

This is why sponsors will aim to refinance once the majority of the value is added into the property and revenues are increasing.

A refinance is often done through a supplemental loan, to keep the original loan in place (unless interest rates are lower, which would be more advantageous). The property will likely receive a higher appraisal value based on the new revenues so the supplemental loan can be in place for that additional equity, and investors get a chunk of their original capital returned.

For example, if you invested $100,000 into a value-add multifamily syndication, and, after 18 months the sponsors refinanced the property and returned 40% of investor capital, that means you would receive $40,000 of your original capital back after just 18 months. That $40,000 is in addition to the cash flow distributions you’re still receiving as if the initial $100,000 were invested!

This is the beauty of value-add investments and why we focus on this asset class. However, since there are so many factors at play in a value-add property, there's no way to guarantee a refinance will happen, and when. In some cases, the market is strong and buyers are interested so a better option may be to sell the property earlier than planned.

Phase IV: Hold

Phase V: Sell