syndication processing example

Fractional Dutch Auctions of Commercial Income-Producing Real Estate Properties - TIC Plan Ownership Syndications

Syndication Example...

For the purposes of Real Estate Plays Dot Com, LLC (the "Syndicator" or "REPDOC"), a syndication shall mean the sale of fractional tenants-in-common real property ownership interests in exchange for cash. The purchasers of these tenants-in-common interests will share some common contractual terms that, under the terms of the contract, allow them to receive a share of any future cash flows the project may generate. A purchaser also has the right to resell their holdings at a time of their choosing and for any price they agree to accept from a future purchaser. Under certain circumstances REPDOC will act as a purchaser and resell the unit through the syndication platform (realestateplays.com^sm bulletin board auction listing service).

The purpose of this web page is to provide a working example of a syndication proposal. To get things started on the right foot, we need to know:

What the terms all mean - syndicate, syndicator and syndication all have slightly different meanings. Syndicate refers to a group of individual investors who purchase the tenants-in-common fractional ownership interests and close escrow (take possession and fund). Syndicator refers to Real Estate Plays Dot Com, LLC ("REPDOC" or "Syndicator"). Syndication refers to the process of marketing and selling the tenants-in-common fractional ownership interest plan (called a "TIC Plan") units to third-party purchasers of commercial real estate ownership interests who are seeking an economic gain in exchange for purchasing and holding their respective units of fractional ownership interests.
The name of the Sponsor, which for the sake of this example we will also assume to be the Developer; ABC Development Company, LLC.
What kind of project is being proposed for financing; a senior rental apartment building.
How big the project budget is estimated to be; $15,022,111 - picked out of thin air.
The projected holding period of the investment - the time the Developer/Sponsor believes it will take to develop the project, place it in service and achieve its maximum sustainable occupancy; some 20 months.
The amount of approved construction financing the Sponsor has obtained (or has failed to obtain); none as yet but has a lender that looks like it is going to do the deal if the Syndication is successful.
The proposed business deal the Sponsor is offering to the Syndicate participants; a three-year holding period with a total payout of $5,000,000 on a $3,000,000 investment. This is a pass-thru offer that is transferred from the Sponsor to the Syndicator; and, from the Syndicator to the Syndicate purchasers (there is a "flip" at the close of the real estate purchase agreement escrow account.

ABC Development Company, LLC (the "Developer", "Sponsor" or "ABC") is sponsoring the development, construction, financing and operations of a new senior apartment building (the "Project"). The Total Project Budget forecasts $15,022,111 (USD) in capital expenditures.

ABC doesn't have a bankable construction loan commitment, but believes it can obtain a bank loan for $12,000,000 based upon discussions and negotiations to date (written evidence being required to substantiate ABC's claim). These conditions make this proposed Syndicate a Pre-Construction Phase Syndicate proposal. The Developer will have to put up the $22,111 and the Syndication will be for $3,000,000 (the assumed equity gap that will be held in escrow and not expensed except to pay lender origination fees, but not placement fees of brokers, mortgage bankers or investment bankers) in advance of the closing of the Syndicate's escrow account for the construction mortgage financing loan. The $3,000,000 in net proceeds requires a gross (because of fees to be paid to the Syndicator) Syndication of $3,275,000; or, some 131 total units that will net the Syndicate and ABC $3,000,000. The $3,000,000 is shown as net proceeds with the Syndicate fee being not included in the proposed project's capital finance budget (the development budget).

ABC doesn't have a bankable firm commitment for the construction mortgage financing loan, so this means that ABC's Syndicate holding period must be projected to be three (3) years or less. In the case of this senior apartment building, ABC's due diligence indicates the project will take 8 months to build-out from the date of closing of the Syndicate and 12 months to fully stabilize; or 20 months in total. The lease-up period is substantiated by the findings of the market study. The Design/Builder for the project is guaranteeing completion in 255 days, adjusted for weather conditions for a total of $11,450,000 (the rest being soft costs, financing and land costs). The costs of construction are slightly lower than those projected in the Project Pro Forma Financial Analysis Presentation. Everything seems reasonable enough regarding the expectations for the asset development schedule and cost.

Syndications at the pre-construction level are expected to provide a gross return of 150% to 350%. When divided by the 3-year holding period, it works out to no less than 50% per annum to a bit higher than 116% per annum. ABC believes the project will be worth $4,000,000 more once it stabilizes. ABC plans to split the upside 50% to the Developer and 50% to the holders of fractional units in the future syndication that will (if successful) provide the Pre-Construction Phase syndicate investors with the opportunity to exit the transaction and take their money off the table. This means the new syndication will be for $19,022,111 and $5,000,000 will be handed over to the Pre-Construction Phase syndication investors.

Let's further assume that ABC is a really great developer and the project is developed and brought online right on schedule and right on budget (rare enough, but possible). This means the $5,000,000 must be considered on the annualized basis of one year and 8 months (20 months in total). This works out to an equivalent cash-on-cash annual return of 100% ($5,000,000 ÷ $3,000,000 ÷ 20 months = 8.33% per month. The 8.33% per month rate multiplied by 12 gives an equivalent annual cash-on-cash rate of return of 100% per annum (for those of you who are numbers wizards, it works out to an internal rate of return of 117.47% per annum). The syndication participants who are in the first syndication have some choices to consider:

They can 1031 into the Post-Construction Syndication (at double the original basis in this case - their units become worth two units); or
They can take their profit and walk away with (in this case) $50,000 per unit for being in the deal for less than three years (in this case, less than two years); or
Any combination of these two choices above.

Now let us return to the example. Let's assume that ABC finishes its negotiations for the construction mortgage financing and is able to close on the construction loan within 90 days of the date of closing the Pre-Construction Phase Syndication (the first syndication). This adds three (3) more months to the holding period. The math changes as follows:

$5,000,000 ÷ $3,000,000 = 166.67% Total Cash-on-Cash Return
166.67% ÷ 23 = 7.25% Per Month Return.
7.25% x 12 = 86.96% Annualized Cash-On-Cash Return for Holding Period.

While the proposed Project was being built-out and stabilized - all 20 months (once closed!) of it are eligible for the Post-Construction Phase Syndication to take place and Post-Construction Phase Syndication real estate contracts are available over the aforementioned development and initial lease-up period. In this case, there has to be a way to get that $2 million (minimum) out of the deal and return the original $3,000,000 back to the investors. This means the Post-Construction Syndication has to be for the original development cost ($15,022,111) plus the $2,000,000 profit spread to be paid to the Pre-Construction Phase Syndicate participants to buy-out their interests (or convert them into the Post-Construction Phase Syndication if they so choose). That means the minimum Syndicate sales level has to be at least $5,000,000 (the profit spread plus the basis) - or 218 units ($23,000 Net Proceeds Per Unit divided into $5,000,000 yields $5,014,000) to close.

All sales in excess of the 218 units will be used to retire the outstanding balance of the construction mortgage financing. Once the outstanding mortgage financing (and all other loan balances outstanding) has been retired, all future unit sales benefit the Developer/Sponsor. The sell-out is based upon the following formulae:

First, pay off the Pre-Construction Phase Syndicate (or convert their units into their equivalent value in the Post-Construction Phase Syndication); then
Next, to the extent funds are available, pay down the construction mortgage financing loan until it is paid-off; then
Next, to the extent funds are available, pay down any other outstanding amounts including:
- Cash value of Accounts Receivable; and
- All of the Accounts Payable to bring it to a current cash zero balance; and
- All sums required to fund the project reserves accounts to a current balance.
Any remaining sales to be those units held by the Developer that the Developer wishes to liquidate.

The process of accounting for it all is based upon the:

Total Pre-Construction Phase Syndication Payoff Amount: $5,000,000.
Total Outstanding Construction Mortgage Financing Loan Balance: $12,000,000.
Total Syndication Amount: $17,000,000.
Total Units Allocated to Purchasers @ $25,000 Per Unit: 680.
Total Units Allocated to Developer @ $25,000 Per Unit: 680.

The market will decide whether these returns are acceptable for the risks involved. So we better have a discussion about risks, risks management and rewards.

Click here to learn about risks.

Send mail to info@realestateplays.com with questions or comments about this web site.

15519 Dawnbrook Drive, Houston, Texas 77068

Telephone: 832.659.5009

Fax: 206.600.5310