The Capital Stack
This week’s article features part II of the series on syndication, Capital Raising. As we discussed in last week’s article, each aspect of the syndication business — finding deals, raising capital, and asset management — plays a crucial role. Success in one area is reliant on the effectiveness of the others.
Typically, there are two main sources of capital needed to fund a project. One source is formal institutions like banks or credit unions. The other source is contributions from the GP (General Partner) and money raised from LPs (Limited Partners).
Banks usually invest in properties through debt. They feel safe lending about 50-80% of the property’s value because if things go wrong, they can sell the property and get their money back first, protecting their clients’ money.
On the other hand, LPs are looking to grow their money. They are willing to take bigger risks without the security that banks have because they hope to earn 12-15% or more in returns.
Now, let’s explore how we secure loans from our banking partners.
Bank Partners
When we talk to our bank partners, we make sure to stay very organized. The bank lenders we work with need to put together a special package called a bank underwriting package. They give us a list of what they need, and as long as we have all the information from the seller, we can quickly put it all together in clear and neat documents, usually in just one day. The more detailed information we can give them, the easier their job is, and the faster we can get our loan approved. Our main goal is to make the process smooth and simple for them.
Also, we keep important documents like our personal financial statement (PFS), Schedule of Real Estate Owned (SREO), and tax returns from the past 2-3 years updated and ready. Banks often ask for these, so having them prepared helps speed things up.
In addition, we show a list of our past deals to prove that we have good experience. This makes the lender feel more confident in giving us the loan because it shows we know how to manage the property well.
Limited Partners
Our proven track record of successful investment cycles is our greatest asset in attracting new capital. While every deal is different, we have now gone full cycle on several deals, including 3 last year. This track record builds investor confidence by demonstrating our ability to execute.
Additionally, we create investor trust by demonstrating our capability to replicate successful strategies across similar deals. By highlighting our repeatable business model and comparing past properties with our current acquisitions, we reassure investors of our capacity to replicate success. While returns may vary, our history of delivering strong performances boosts investors’ confidence. The rapid oversubscription of our recent capital raise, completed in just 32 minutes, underscores the trust and excitement investors have in our investment opportunities.
We are very thankful for our Limited Partners, and we prioritize maintaining open communication with them. We provide monthly reports and quarterly distributions, ensuring they are always informed about their investments. We make it a point to respond promptly to emails, texts, calls, or any inquiries from LPs, offering reassurance that we’re readily available whenever they need assistance or have questions.
Final Thoughts
It’s a bit of a dance. First, we hunt for a willing seller with a deal that meets our buying criteria. Next, we secure financing from a bank that enables us to meet our targeted returns. Simultaneously, we engage with LPs looking to expand their investment portfolios through private real estate ventures. Aligning all these pieces is crucial for a successful investment outcome for all parties involved. It’s very fun, it can be stressful, and it’s rare for things to go exactly to plan, but it’s beautiful seeing it all come together. We are very appreciative to our LPs and lenders for trusting us to steward their capital.
Major Market News
Detroit, MI Development
Attention Detroit locals: A development is on the horizon in downtown! Bedrock Detroit revealed plans for the city’s first 5-star hotel, to be housed within Hudson’s Detroit, Michigan’s second tallest building. Edition, a renowned global luxury hotel brand, will spearhead this ambitious project, marking its debut in the Midwest. Dan Gilbert, Founder of Bedrock, hailed the partnership as a testament to Detroit’s allure and potential. The Detroit Edition and the Residences at the Detroit Edition will occupy all 45 floors of the tower, promising unmatched luxury and amenities. Scheduled for commercial tenant build-out by 2025, this initiative is poised to redefine Detroit’s hospitality scene. Additionally, the Residences at the Detroit Edition will offer 97 condos for sale, boasting stunning views of the Detroit River and downtown Detroit, along with exclusive amenities for residents.
Source: MLIVE. (2024, April 17th) Downtown Detroit is getting its first 5-star hotel. https://www.mlive.com/business/2024/04/downtown-detroit-is-getting-its-first-5-star-hotel.html
Tips and Tricks
Terms-
GP Co-Investment: The General Partner (GP) co-investment refers to the financial contribution made by the entity responsible for managing the investment. By investing their own capital alongside the LPs, GPs demonstrate their commitment to the success of the investment and share in both the risks and potential rewards.
