General partners should never guarantee a return. No investment is without risk. A preferred return, should be a projection, never a promise. This is certainly the case at Stone Banyan Capital, but we do forecast conservatively so that expectations are met and if all goes to plan or better, exceeded.
Ideally, the general partners projected returns exceed the return offered. That way, if they don’t achieve the projected returns, they still distribute the full preferred return. If the actual returns end up being lower than the preferred return, the process is that which was agreed to in the PPM. Generally, the preferred return will accrue until it can be paid with the sales proceeds.
Similar to the question about “what happens if the project fails?”, if the general partner (GP) says there are no risks, they are either lying or inexperienced.
The three risk areas associated with apartments are the apartment, the market and the team. Therefore, ask the GP about the risks associated with these three areas and what they are doing to mitigate them.
At Stone Banyan Capital, we constantly strive to minimize risks, but, there are risks. We view risk mitigation as being the “last to fall”, so we do all we can to ensure low risk operation so that if a risk scenario is playing out, we are hindered the least and last. This goes for all three major areas – acquisition, the market, and the team performing. Our apartment (property specific) offerings highlight what we see as risks and our mitigation plans for them.
The general partner (Stone Banyan Capital) provides you with the projected timeline, which includes the hold period and the exit strategy of the apartment, generally at Stone Banyan Capital we hold long term and use refinance to extract value. Monthly and refinance events provide cash back to the investors. Projected returns are exceed invested funds at some point between years 3 through 7 of ownership, but the event of fully divesting ownership (selling the apartment) is considered 5-10 years.
This varies. But there will be a process for pulling your money out of the apartment, it will be outlined in the PPM for each opportunity. The process usually entails you selling your shares to another party with the written consent of the general partner (Stone Banyan Capital).
Once the apartment purchase is closed, the general partner (Stone Banyan Capital) sends consistent updates on the status of the purchase. Investors will receive electronic updates once a month. However, some GPs provide quarterly updates. Others provide annual updates. And some don’t provide updates at all.
In regards to the information included in the update, this varies from GP to GP. Our monthly reports include occupancy rates, updates any project plans (like renovating units, repositioning, or new amenities), details on our rentals and how they compare to our projections, capital expenditure updates, relevant updates on the market and resident events. Each quarter, Stone Banyan Capital will provide a link to the apartment’s financial statements, which include the T12 and the rent roll.
Generally, the general partner (Stone Banyan Capital) will make money via the acquisition fee, ongoing asset management, and equity ownership (being an LP) in the apartment. All of the fees will be listed in the PPM. This sounds ambiguous, but will be clear in the PPM, its ambiguous because different apartments are better served with different approaches to structuring. At the end of the day, fees are to drive alignment and are critical towards reaching the collective goals.
The general partner (Stone Banyan Capital) will have their own funds in each apartment because this is an extra level of alignment of interests. If you lose money, the GP loses money. If the GP doesn’t invest in the apartment, they aren’t exposed to the same risks as you. Additionally, the GP investing in the apartment signals to you that they are confident in the apartment and the projected returns. The percentage ownership can range quite a bit depending on apartment acquisition dynamics. Breakdowns will be provided in the PPM for each apartment opportunity.
The typical frequencies are monthly, quarterly or annually. Stone Banyan Capital will do what the majority of investors prefer – monthly distributions, so that’s what we decided to do. We aim to distribute returns on a monthly basis and any profit above and beyond the preferred return is distributed every 12 months. Most likely, you will receive a your monthly, and annual distribution 30 to 45 days after the end of the relevant period.
Most general partners (GP) will have a minimum investment. The more experience the GP has and the larger the project, the higher the minimum.
The maximum amount of money we allow to be invested by one person is 19% of the total down payment. Anything greater than 19% requires that investor to be underwritten by the lender, and the investor usually does not want that happening as its is a big headache.
Most passive investors will invest in their own name, while others will create an LLC and invest through that. Let’s discuss as we can help with recommendations and references as needed. There are some advantages to both routes that we can discuss.
Stone Banyan Capital accepts investments through a Self-Directed Individual Retirement Account (SD-IRA) and Self-Directed 401ks (SD-401k). SD retirement accounts allows you to invest your tax-advantaged retirement dollars into alternative investments that a standard IRA and 401ks will not.
If you are investing with a SD-IRA or SD-401K (or interested in converting yours to a self directed), make sure you work with a custodian who has experience with investing self directed retirement accounts into syndications or real estate investments to ensure that you are in adherence with the IRS tax code. At Stone Banyan Capital, we can connect you with our personal custodians if you desire to proceed further. It is not as scary as the mainstream paints it to be.
Most likely, the general partner is either selling private securities (which is what joint apartment ownership is via Stone Banyan Capital) to the limited partners under Rule 506(b) or 506(c). One key difference is that 506(c) allows for general solicitation or advertising of the apartment offer to the public, while 506(b) offerings do not. The other difference is the type of person who can invest in each offering type. For the 506(b), there can be up to 35 unaccredited but sophisticated investors, while 506(c) is strictly for accredited investors (>90% of the population are not accredited investors).
If the general partner sold their shares on an apartment before selling the property, you want to know why. At Stone Banyan Capital we do not.
The reason why you want to invest with a GP who also invests in their own apartments is because of the alignment of interests – if the apartment doesn’t perform as expected, they make less money. Once a GP sells their shares, that alignment of interests is impaired. This is an undesired scenario for Investors and hinders reaching the goal.
At Stone Banyan Capital, we will add you to our potential investors email list where you will be kept updated on new apartment offerings, status on owned apartments (limited data for those not owning), and generic communications.
As a passive investor, you need to have a high level of confidence with the individuals that make up the general partner (GP), as you are entrusting them with some of your money. One way to determine the character of the GP is to determine if their family and friends invest in their apartments. At Stone Banyan Capital, we have a strong family and friends tie-in. Our family and friends are our foundation to achieving both theirs and our goals.
On all tax related questions, always consult with your accountant (we can refer you to ones we trust if desired). But generally, passive investors are attracted to real estate because of depreciation. Most likely, the depreciation will be greater than the cash distributions paid out each year, which can reduce or even eliminate your tax bill until you receive your profits from the sale proceeds at sale (if we sale).
At Stone Banyan Capital, we pass on the depreciation to the investors (this is something not all syndicators offer). Our goal is to help our friends and families protect and grow wealth, passing deprecation to the LPs is critical in that.
Different lenders offer different options in terms of floating rates vs fixed rates. A lot of this depends on where the lenders are getting their money from and how they need to price it in order to get the returns they are looking for. Many of the longer term lenders (such as Fannie and Freddie) offer fixed rate debt since they tie their loans to treasuries. Since these lenders have priced their loan with the expectation for the loan to be in place for a long period, there is usually a high prepayment penalty if the general partner (GP) wanted to sell or refinance the loan early. Most of the shorter term lenders will offer floating rates tied to the 1 month LIBOR. Since the loan is tied to a shorter term security, the floating rate loan offers a lot of flexibility to sell or refinance the loan without a large prepayment.
The pros and cons of this is really property specific. At a high level, they are both good options, however, the GP will typically choose a floating or fixed rate to match the specific business plan for the apartment. For apartments that will be drastically improved overtime, a floating rate loan makes the most sense since it provides ultimate flexibility to sell or refinance the apartment upon completion of the business plan. For apartments that will be improved (but not as drastically), longer term fixed rate debt is a better option. Although it is difficult to refinance the fixed rate debt early in the hold, the GP can secure supplemental loans to capture some of the value that was created from the implementation of the business plan.
At Stone Banyan Capital, there are two ways we search for apartments, on-market and off-market. Off-market apartments, offer a variety of benefits that get forfeited once an apartment is on the market. Off-market apartments are less competitive with more opportunity for negotiation, which typically means better purchase terms, which means better returns for the investors (and ironically the seller as well).
The type of financing is determined on a case-by-case basis. Generally, the general partner (GP) will perform renovations, they will get a short-term, preferably interest-only, loan, and then refinance into a permanent loan once the renovations are completed. However, the more risk adverse GPs (Stone Banyan Capital) can secure better loan terms, even forgoing the short-term loan and get long-term permanent agency debt that includes the capital expenditure costs at acquisition. This represents a major risk mitigating component – long term debt at purchase when the apartment is at the most risk it will ever be at.
As long as the general partner (GP) performed adequate due diligence on the asset and has a team that can execute the business plan, the project shouldn’t fail. And by fail, I mean that you don’t receive your preferred returns and/or initial equity investment at the sale. However, like any investment, failure is always a possibility. At Stone Banyan Capital, we run sensitivity analysis, which determines the returns based on changing certain variables like the rent premiums, exit cap rate, purchase price, interest rate, occupancy rates, etc… to formally analyze various risks to an apartment which all add up to estimate our returns.
At Stone Banyan Capital we have contingency plans and operating reserve funds to cover shortfalls. In general, we hold reserves of 6-12 months worth of operating expense and debt payments – that means we can pay all expenses and debt without a singly penny in rent for 6-12 months – this is a very healthy reserve but does come at the degradation of short terms returns (cash returns are reduced), but the risk mitigation provided helps ensure we reach our goals, even if it takes a little bit longer due to slower returns.
The money you invest in the apartment goes towards a variety of costs associated with purchasing an apartment. These include the down payment for the loan, financing fees, general partner fees charged for putting the apartment purchase together, contingency or operating reserve account funds and costs associated with performing due diligence.
The PPM will have a “Sources and Uses” section that outlines all the uses of the equity investment for clarity and transparency. All fees are included when presenting expected returns (as is the case in our $100K example).
At Stone Banyan Capital, we will notify you of a new opportunity, share an overview of the property/details and invite you to a conference call in order to provide you with the specifics on the apartment to be acquired. If you are unable to attend the conference call, no problem. We record the calls and send the video out the next day.
After the conference call, if the apartment meets your investing goals, you will decide to verbally commit or pass.
After that, you will be required to sign documents to finalize your commitment, which includes a private placement memorandum (outlines structure of and the risks associated with the apartment), an operating agreement (outlines the GP and limited partner responsibilities and ownership percentages), a subscription agreement (outlines the number of shares you own of the LLC that owns the apartment). We will also have you fill out a direct deposit form so that you will automatically receive your distributions each month with out having to cash a check.
Once you’ve finalized your commitment, you only have to wait for us to close the apartment.
This is our process at Stone Banyan Capital, but other GPs may have a different but similar process.
It sounds like a lot of technical documentation, and it is, but we will be assisting the path to help with any questions, concerns, how-tos, etc… along the way. The first time will be scary, but then you will understand how all the process works for next time.
Some general partners will notify all of their passive investors at the same time, while others may notify their “preferred investors” first. At Stone Banyan Capital, all investors are notified at the same time and commitments are taken on a “first-come, first-serve” basis to be fair to everyone.
The main difference between the cash-on-cash return and internal rate of return metrics is time. If the limited partners receive monthly distributions, quarterly distributions, or annual distributions, the cash-on-cash return remains the same (it equals the total distribution for the year divided by the initial equity investment), but the internal rate of return is different for all three distribution frequencies, because internal rate of return accounts for the time value of money.
For apartment syndications, the majority of owners are selling because they’ve reached the end of their business plan. But, some owners may sell because they are distressed in some form or because they originally purchased the property for cash flow and didn’t make any value-add improvements so it is in a state of deferred maintenance/inefficient.
The combination of the costs associated with purchasing the property and the capital expenditure costs should be lower than the value of comparable properties in the area. That difference is free equity, which will increase the refinance and sale proceeds.
If the acquisition plus capital expenditure costs are equal to or higher than comparable properties in the area, the general partner is paying too much for the property and your profits at sale or equity returned at refinance will be reduced. We at Stone Banyan Capital strive to avoid this as it represents the single largest risk.
The going-in cap rate is based on the purchase price and the current net operating income. You want to know the going-in cap rate so you can compare it to the cap rate in the market. A going-in cap rate that is higher than the market cap rate is a good sign, because that means the property is purchased below market value.
You want to know the stabilized cap rate and how it compares to the market cap rate, with the former being higher than the latter as the ideal scenario.
Understanding the quality of the major systems is important for the general partner (GP) to determine an exterior capital expenditures budget. Additionally, if the major systems are in bad shape, this is a risk factor and should be addressed with a contingency budget. At Stone Banyan Capital we have a set of 5 specialized inspectors that inspect the property during due diligence to ensure we know the condition of all the major systems.
The hold period is the amount of time the general partner plans on holding onto the apartment. This will let you know how long your initial capital will be locked into the apartment. We assume 5-10 years. Monthly and cash out refinance returns are distributed monthly or at the time of the event (refinance).
A conservative annual gross potential income and expense growth factor is between 2% to 5%. This factor is the projected natural growth in revenue and is more commonly considered to be driven by inflation.
You want to know if the annual tax assumption is based on what the current owner is paying or if it is based on the purchase price. The latter is the correct approach that Stone Banyan Capital underwrites according to.
Stone Banyan Capital saves $250 to $300 per unit per year in reserves. This is in addition to the upfront operating account funding.
This is to cover ongoing shortfalls or unexpected capital expenditure projects. These reserves are modeled in and conveyed in the PPM
The relevant return factor is based on your investing preferences. Stone Banyan Capital calculates returns using factors like cash-on-cash return, internal rate of return and equity multiple. You may have return goals for one, two or all three of these return factors.
If Stone Banyan Capital is offers a 506b offering, you don’t need to submit your financials. If it is a 506c offering, financial reporting will be needed.
When you invest in a syndication as a limited partner, you have limited liability. If the general partner is sued, you are not personally liable. However, a settlement or fine may impact your returns, but never your non-invested wealth (wealth not invested into the specific property being sued). Other non-invested wealth/value in personal homes, cars, savings, or any other investments of yours are untouchable by any events occurring on the specific apartment being sued. This compartmentalizes all your wealth generating assets so that one cannot impact (negatively) the others.