Multifamily Real Estate Deal Structures: Key Concepts

The structure of a multifamily real estate deal is crucial for aligning the interests of both owners/operators and investors. Proper structuring ensures that all parties benefit from the property’s performance.

1. Incentive Alignment

• • Objective: Align interests between investors and operators.
  • Example: In a syndication, investors get priority on income. Operators might earn more if performance targets are exceeded.

2. Capital Stack

• • Senior Debt: First claim on property income, typically covering 75% of the purchase price. Typical senior debt is a bank loan.
  • Common Equity: Represents ownership in the property. Higher risk but potential for higher returns after senior debt obligations are met.

3. Deal Structures

• • Partnership/Joint Venture:
    
    • Structure: Few investors pool resources.
    • Benefits: Lower costs, quicker decisions.
    • Risks: Fewer people to share costs, potential disagreements.
  • Syndication:
    
    • Structure: General Partners (GP) manage the property; Limited Partners (LP) provide capital.
    • Benefits: GPs may earn extra income for exceeding targets. LPs benefit from professional management.
    • Risks: Higher costs for GPs; LPs have less control.

4. Offering Documents

• • Importance: Critical for understanding deal specifics, including ownership, rights, and income distribution.
  • Action: Review thoroughly before investing.

5. Key Considerations

• • Ownership Structures:
    
    • Joint Venture/Partnership: Typically 2-4 owners with shared ownership.
    • Syndication: Many equity holders with detailed ownership and voting rights.
  • Capital Calls:
    
    • Description: Additional funding may be needed unexpectedly.
    • Impact: Non-compliance can lead to ownership dilution.
  • Return Metrics:
    
    • Internal Rate of Return (IRR): A good IRR target is 15%+
    • Equity Multiple: Ratio of capital returned to capital invested.
  • Income Splits:
    
    • Partnership/Joint Venture: Income split based on ownership percentage.
    • Syndication: May include performance-based splits (e.g., preferred return and promote structure).

Examples

1. Partnership/Joint Venture:
   • Two partners each contribute equally and share income equally.
2. Syndication:
   • Structure: GP (10% ownership) and LPs (90% ownership). LPs receive an 8% preferred return first; remaining income is split.
3. Sweat Equity:
   • Structure: GP contributes expertise without capital; LPs cover all capital. LPs receive an 8% preferred return first, with excess split 50/50.

Performance Metrics

• IRR: Measures annualized return rate.
• Equity Multiple: Measures total return relative to initial investment.
• Cash on Cash Return: Annual cash flow return on the invested cash.

Conclusion

Understanding multifamily deal structures, including ownership arrangements, fees, capital calls, return metrics, and income splits, is essential for making informed investment decisions. Thoroughly review offering documents and consider the experience of the management team to ensure a successful investment outcome.