For the deal sponsor and the investor alike, a well articulated business plan for commercial multifamily syndication is a key to entering a successful deal.
So, you found a great deal? Now what?
A deal sponsor will write a business plan to present a deal to investors and lenders prior to the closing the acquisition by demonstrating how the property will generate positive returns for investors.
The business plan will:
- highlight the strengths of the team, the market / sub-market, the property itself
- explain how you will increase the Net Operating Income (income minus expenses) - in other words how you will increase the income (ex. renovations) and decrease expenses (ex. use professional property management)
- present the deal structure from a financing and partnership standpoint
- and finally show how the property is projected to perform financially and how it translates for the investors.
For whom to write a business plan?
1. For yourself: You want to make sure that you have a clear vision of why and how the deal will make money.
2. For lenders: Though lenders will perform their own underwriting, they will look for answers to questions such as who will manage the property and how much capital will be invested.
3. For investors: A well thought business plan will give confidence to investors to invest in the deal.
What to write in a business plan?
Let's review the key sections to include in the business plan and the questions you want to address for each of them:
0. Executive Summary
Why is this a good deal in one page?
Why is the team assembled ideal for the deal?
- Sponsors team with bio and track record
- Property Manager with bio and track record
- Additionally, you can mention the lender, real estate attorney, syndication attorney and CPA
Why is the market worth investing in?
- Population size and growth
- Employment trend
- Key employers and industries
- News about major investments in the market
Why is the sub-market attractive compared to the rest of the market?
- Class of the sub-market
- Key employers
- Key businesses, attractions, stores
- Schools (good schools will attract quality tenant)
- Economics: Average household income, number and type of jobs: white collar vs. blue collar
- Comparable properties: occupancy, rents and key features: renovated units, amenities
What are the characteristics of the property?
- Class of the property
- Number of units and their breakdown in 1, 2, etc. bedrooms and bathrooms.
- Units size
- Year built
- Current average rent
5. Income improvement
What are your plans to increase the income?
- Bring rents to comparable market level rents
- Re-position of the property through renovations interior and exterior
- Raise occupancy to market level
- Bulk Cable / Internet contract
- Pet fee
- Garbage pick up service
- Preferred parking
- Add Laundry room, Storage units, Vending machines
What is your renovation plan?
- Key findings of the property inspection
- Upgrades list for interior and exterior and how they compare to the sub-market
- Schedule: how many units are turned in a year and exterior renovations
- Budget for Capital Expenses
- Target rent after renovations
7. Expenses improvement
What are your plans to decrease expenses?
- Average cost to operate comparable properties by your property manager vs. the seller
- RUBS (make the tenant pay for common utilities)
- Water consumption reduction plan with low flow faucets, etc. [if not individually metered]
- State, county or city tax incentives
8. Attract and retain tenants
What is your plan to boost occupancy with quality tenants and lower turnover?
- Leasing and maintenance management improvement
- Tenant screening
- Security system
- Develop a community (with for example property events)
9. Capital Stack
How is the acquisition financially structured?
- Purchase Price
- Loan type, loan amount, Interest Rate, Term, Amortization
- Down Payment
- Clothing fees
- Investors equity
10. Financial Projections
What are the projected income, expenses and cash flow for the deal?
- Income including phasing of target rents
- Assumption for vacancy
- Expenses including phasing of improvements
- Assumptions for Income and Expenses growth rate, assumption for Capitalization Rate at exit
- Debt payment
- Capital budget (renovation budget)
- Cash flow
How are the voting rights and profits shared?
- Split between General Partners and Limited Partners
- Preferred Return and hurdles
- Voting Rights
12. Exit Strategy
When and how will you dispose of the asset?
- Target holding period
- Cash-Out Refinance option
- Capitalization rate at exit
- Target buyer: individual, syndicator, institution, REIT
13. Returns Projections
What can an investor expect financially for investing in the deal?
- Investors Cash Flow
- Investors capital account showing refinance and exit
- Cash on Cash Return
- Internal Rate of Return or Average Return
14. Post Acquisition Schedule
What can an investor expect after investing in the deal?
- Management Reports
- Key Performance Indicators
- Financial Reports
- Distributions schedule
15. Acquisition Schedule
What is the timeline until closing?
- Closing date
- Availability of Private Placement Memorandum
- Opening and ending date for investing
How to write a Business plan?
Gather information from third parties you interact during your analysis of the deal: broker, lender, property manager, inspection company.
Financial projections require an underwriting of current vs. target income and expenses, in conjunction with their improvements phasing and assumptions.
Don't worry about addressing each and every topic pertaining to income and expenses improvement: they may or may not apply to you. The key is to demonstrate how you improve the cash flow.
Prepare slides or a document showing these details with pictures and charts. Bear in mind to using a pleasant format for the reader.
When to write a business plan?
The business plan preparation is started the first when working on a deal: the initial underwriting of a deal will require to address many of the topics listed above.
You will finalize the business plan towards the end of the due diligence on the property, right before you present the deal to your investors.
From highlighting the team, the market / sub-market, the property itself to projecting returns, the business plan is a rich document. With all the sections covered and your strategy explained, the business plan is a powerful tool for a deal sponsor to make a strong case to investors and it is a key to a successful deal.
Each section substance is worth a dedicated article. Stay Tuned!