After having hundreds of conversations with investors, I have come to realize that most investors that are new to the multifamily space are simply not aware of how simple the process actually is. Although it is vital that each step in the process is taken very seriously, it is actually very straightforward and simple to navigate. We want our investors to have a no-fuss experience when investing with us so we’ve put together this step-by-step process that will help answer most of the questions that come up for investors.
Step 1: Understanding and Signing the Private Placement Memorandum (PPM)
The first thing that you will want to do is read through the Investor Summary. This document will explain valuable information about the deal and the syndication team that is expected to execute the business plan. This is your opportunity to ask any questions that you may have.
At this time, you will want to do your own due diligence. You will want to understand at minimum the market and submarket that the property is located in. Is it a strong market with population, job, and rent growth? Does the market have a high median income? What is the average vacancy rate? Is the state a landlord friendly state? A simple google search can help answer these questions for you.
After getting comfortable with the market and syndication team, you will want to turn your attention to the PPM and wade through the numerous pages of legal jargon to make sure that you understand the following…
The Offering Memorandum: This section includes a description of the property, information about the general partner (GP) and the business plan. Sometimes this is an addendum to the PPM.
Warnings and Disclosures: This section explains all the potential risk factors such as how you can lose money and how the deal may not meet the projected returns. Of course, the syndication team doesn’t expect any of this to actually happen, however, this document wants to ensure that the investors are willing to accept the risk they are taking by investing in the deal.
Distributions: This section will describe the types of shares that are being offered in the syndication and who will hold the different types of shares. The equity splits will be explained and well as the distribution schedule. You want to understand what equity percentages are allocated to the Limited Partners and how often you can expect a profit distribution.
Operation Agreement: The Limited Partners and General Partners are members of the LLC. The Operating Agreement will explain in detail how the Limited Liability Company will be run, who manages the LLC, the managers comp0ppensation and responsibilities, the member classes, voting rights and the distribution of funds to the Limited Partners. This document will be filed when the LLC is registered.
There are a couple more things that you need to understand as a Limited Partner. You will want to understand if it is possible to sell your shares in the LLC should an emergency occur. If it is possible, what are the rules around this. The PPM also covers the fee structure including the equity split and when the General Partners get paid. Common fees paid to the GP include:
Equity Split 70%(LP) / 30%(GP)
1%-2% transaction fee at closing- compensates the syndicator for their work in getting the deal closed often times upto 6 months
1%-3% of effective income asset management fee- designed to cover time and expenses in managing the property manager
If you see other fees you do not understand, ask the sponsor to explain what they are and when they will be paid to the general partner. If you understand and agree with how things are structured then it’s time to sign the Subscription Agreement. This can be done via DocUSign if available or printed out and emailed back to the sponsor. There will be a short Investor Questionnaire to fill out, the signature page and a W-4 for distributions. It’s as simple as that!
If the offering is a 506(c), you may be required to submit proof of accreditation letter signed by either your accountant or a third party verification company.
Step 2: Wiring the Funds
Once you have signed the Documents and received confirmation that your sponsor has received them, you can fund the deal. This can be done via check or wire transfer.
Step 3: Written Confirmation
After the funds are verified, you will receive written confirmation that you are an investor in the deal. You will want to keep this notification for your records.
Step 4: Updates from the Syndication Team
The first update you will receive will be a congratulations when the deal is officially closed. After that, you will receive an update on the progress of your investment on a regular basis. This update typically comes monthly or quarterly depending on the distribution schedule of the deal. Distributions will be either mailed to you or sent via wire transfer to your account.
We hope that this explanation is helpful and will take the unknown out of investing in a multifamily deal. Your syndication team should be more than willing to answer any and all of your questions and be willing to make this process as painless as possible for you as a partner in the deal.