Finding a property and getting it under contract are only part of the process. The acquisition still needs financing, the investment structure must be established, and the legal documents governing the investment must be prepared.
These pieces develop alongside underwriting and due diligence and must align before we ever get to the closing table.
Financing enters the process early, often around the time or before a signed PSA is finalized. Once the transaction advances, the lender’s work becomes progressively more detailed. Property financials, borrower qualifications, appraisal, environmental and property-condition reports, insurance, title, debt-service requirements, reserves, and other lender requirements may all become part of the financing and underwriting process.
As an acquisition moves forward, our lender begins the work of identifying financing appropriate for the property and business plan. Depending on the investment, this may include agency, bridge, bank, or other forms of multifamily financing. Interest rate, leverage, loan term, amortization, debt-service requirements, prepayment provisions, reserves and other loan terms all become part of the analysis.
The question isn’t simply how much a lender is willing to lend. It’s whether the financing makes sense for the deal.
When passive investor capital is brought together to participate in a multifamily acquisition, the investment may be structured through what is commonly referred to as a real estate syndication.
The active side of the investment, often referred to as the sponsor or General Partner (GP) is responsible for putting the investment together and overseeing execution of the business plan. Passive investors are often referred to as Limited Partners (LPs) and provide investment capital without taking on the day-to-day responsibility of operating the property.The exact legal structure and terminology can vary between investments. The ownership structure, parties’ responsibilities, capital requirements, distribution provisions, and other economic terms are established for the particular offering.
Experienced securities counsel is brought in to provide guidance on the structure, offering documents, investor communications, and compliance with applicable securities laws.
An important part of structuring each investment is considering how the interests of the investors and the people responsible for executing the business plan are aligned. The specific economic terms can vary from one investment to another and may include preferred returns, distribution priorities, sponsor compensation, profit-sharing arrangements, and capital invested by the sponsor alongside passive investors. Those terms should be clearly explained before an investor commits.
The combination of debt and equity used to acquire and execute the business plan is often referred to as the capital stack. Understanding where the money comes from, and the rights and obligations attached to each layer, is an important part of understanding a multifamily investment. Financing approval, lender requirements, legal documents, entity formation, insurance, title, escrow, investor commitments, due-diligence findings and a number of other moving pieces must align before an acquisition can close.
Passive investing may look passive from the investor’s side. Getting an investment ready for that investor is anything but passive.
