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Syndication

Thursday, June 4, 2020   /   by AJ Shepard

Syndication



AJ Shepard:
All right, so I'm sure you guys are a little bit familiar with syndication, but syndication is the pooling of investor's money together to buy a larger project. So this is how the syndication kind of formation is broken down a little bit. So when we're offering these to investors, we say that the partnership has goals of 7% cash on cash, preferred return, and a projected goal of 20% IRR. I'll go into detail on these a little bit later on. So you guys all know who I am. Some of my resume here, some other stuff. I know that you
guys have no idea who this is, but he's my brother, obviously not better-looking one, but he's got some stuff on his resume here that he's proficient.

Speaker 1:
He has excellent golfer on his resume?

AJ Shepard:
He does, he does.

Speaker 1:
I love it.

AJ Shepard:
So one of the things that we did back in 2014, we bought a track of 14 homes. So we were able to close this directly with the seller. This just kind of speaks to our ability to close deals, make things happen, and also come up with good deals. So we still own all of the homes and the cashflow. At least $5,000 a month. We have another partnership with a person. We've purchased five fourplexes, over the course of four years, I think 1.9 million cash invested, with a refinance of 1.57 return, which means that we only
have what $400,000 in the deal out overall. And the current portfolio value is almost 4 million. So we have less than 10% down essentially on everything after construction costs are paid for and everything else. So $25,000 revenue per month with at least a 7% cash on cash out. So the syndication is formed to go over, there are two different ways that you can form a syndication.


One is an asset-based formation, which is a project by project type, which is what we're doing. When a deal comes up, we formed the partnership and the syndication around that particular project. There is a second type which we are not doing, which is a fund. And essentially a fund is you're always raising money and then as you raise enough money and a project comes up and use that fund to buy the project or do whatever. What's nice about the projects is you're able to give a little bit higher returns because you only use the money when it's needed. With a fund, you can possibly get more and more money in and then you have to search for the deals that apply and you may not be able to provide a high return with a phone. What's nice about having a fund is that you're not under a strict timeline to raise capital.

If you have the money to do it, you can do it. Whereas with the asset-based, one project comes up and you have a small window to raise capital and perform. So one can be stressful, one can be not as stressful. There are pros and cons to each. I just want to make sure you guys know which one is which. We typically do the asset-based type, so within that partnership of the asset base, there are general partners and limited partners. In this particular deal with syndication, with us, my brother and I being Uptown
Syndication would be the general partners, the people managing the project, managing making sure that everything's done correctly, all the construction's done right, that value add plan, and then also the general partners are the ones that dispersed the money to the limited partners. Limited partners are strictly passive investors who will invest capital and then get a return.

They're not going to be making day to day operations plans. We're typically happy to share information with the limited partners as much as they want, but again, they're not the ones making decisions or putting input as to what needs to be done. So partnership goals, Uptown Syndication LLC, which is my brother and myself did managing general partner and as I said, the goal for mostly all of our projects currently is to do a 7% quarterly cash on cash return. And so a preferred return works out a little bit different than just a general return.

What a preferred return is before the general partnership takes any money for a share that 7% preferred is paid. So say one quarter we were doing some extra capital items and the cash on cash return was only 4% well that next quarter if there's a 9% return, that additional 2% will go to make up the law, but and not the less the--

Speaker 1:
Lack of returns?

AJ Shepard:
Lack of return on the 4% for the first quarter. So you would be getting 7% over the entire year, over a year. So for the general partnership would take any sort of profits or any cut. So limited partnership. In order to participate in a syndication, the people participating have to be either accredited investors or they have to be a known quantity to the general partnerships. So that general partnership, meaning my brother and I, there are some limitations that the SCC puts on how much money we can lend and how
many people can be a part of the partnership.

And so that that is what consists of the limited partnership. The limited partners received gains in a couple of different ways. I just kind of went over that 7% preferred return. And in the event that the asset returns more than that 7% the general partnership will take 20% of the above and beyond. So in the case of the preferred return has been paid out 100% and there's an additional for that particular quarter and additional say for the sake of numbers, say an additional 10% of that 10%, 2% would go to the general partner. So if one quarter there was a 17% cash on cash distribution, the preferred return of 7% would be paid first. And then the additional 10% of that 10%, 20% which would be 2% would go to the general partners.

Speaker 1:
What happens to the rest of that 10%?

AJ Shepard:
Gets dispersed to the limited partners. So limited partners, we get the additional 8% so they would receive a 15% cash on cash return to that quarter. General partners would receive 2%. In the termination of the asset, when we sell it, the sales proceeds are paid out. So all of the investor's money is returned 100% and then any additional proceeds get paid out 80% to the limited partners and 20% to the general partners. If we hit that mark od a 20% IRR, then the general partners essentially hit a home run, they've met their goals, we've done everything should have done it was a good investment.

So the general partners feel that they should get paid more. And so any proceeds that are on top of the 20% IRR gets split 50 50 so again, that's kind of a waterfall structure. So if you're not familiar with the internal rate of return, it's a way to value an asset taking into consideration of the tiny value of money. If you make the same amount of money in less than a time, your IRR percentage could go way up. And if you make the same amount of money over a longer period of time, your IRR will go down. So it
combines the cash flows and the projected profits on the sale. Over the five year mark and the funds are adjusted by receiving a 7% preferred rate.

Sort of kind of got an example, let's say we had $50,000 invested in limited partnership and we'd get 20 quarterly returns of $875 would be the direct deposit into the preferred bank account. And then that is your 7% return. That is $3,500 annually and 17,500 over five years. So then once the asset is sold, roughly $85,000 would be returned. So that would mean 32,500 of the existing capital and 50 to 500 gain, assuming a 20% IRR, 10% would base the asset that has 36 you would be getting the 52,500 gain upon the sale of 85,000 and that's per $50,000 share. And that's because the initial 17,500 was returned capital. So that's kind of a distinction, as we give money back to the investor,
we return the capital first and then we'd pay gains. And that way you can get for your taxes until later on.

And a disclaimer, I'm not a tax professional and not able to give tax advice there. I'm not an attorney and not able to give legal advice. All right, so cash on cash return kind of explained a little bit more. Property has produced a 7% return on a $50,000, that's $875 payment. If the property produced a lower return, say 6% they would be paid 750 but then when it produces a greater return than 7% it pays back the difference of $125 that should have been paid out in that first quarter.

And again, it goes into an explanation that anything over and above and beyond that preferred return, the general partnership takes 20% so this explains the IRR split too. So if 50,000 and then $85,000 from be returned on a 20% IRR, if instead 85 was capable of being returned, $95,000 was capable of being returned, the additional profit of the $10,000 when we split 50 50 the limited partner would get 90,000
in the general would be 5,000. We say that we have a maximum of five years into a
project unless we specifically state that up front in the deal and it could be as small as three years.

There is also a possibility of doing a refinance and returning some of the capital in between if that makes the most sense, but that is how syndications are formed and how we particularly do ours. As far as like the waterfalls and payments, I think you'll find as you start looking at a lot of these syndication type deals, there are a thousand different waterfall strategies on how it can be done some can be super confusing. We felt that this one was fairly simple, which fits with what we're trying to do, is we're trying
to do a simple deal-making people a bunch of money and also make some money ourselves in the process. So you guys have any questions?

Speaker 1:
Yeah, I have a few of them. On that slide, that talks about the two different types of syndications? The fund versus the, yeah. If you're doing, obviously you talked about the asset, create an LLC for each asset. If it was a fund and you had money in there, is there, there's no time, necessarily that restraint on it, but if someone puts $50,000 in there, you can't just hold onto it for two years, right? Or is there?

AJ Shepard:
So this is one of the reasons we don't do funds. We find good deals and we allocate funds to those deals and make them happen. In the event of using a fund, there is no determination or length as to when that investor could or should receive their money back. So typically if you're looking at a fund, they will have those terms on them. And one of the differences between syndication that we're doing and some funds is you get into the funds, you get into more sec registered funds and they have to report the FCC.
You can do a small fund, but it's again limited to some of the rules amongst that. We find that abiding by those rules and doing project-based loans provides better returns and also gives some length of time determination for the investor, or at least a projected and assumed it's not just an indefinite.

Speaker 1:
Thank you. And then if you stroll down a couple of slides, I think it's ... Oh yeah. Right there. So limited partners, the one right above that. I know you said you share information with them, but they don't necessarily have voting power, I guess.

AJ Shepard:
Nope.

Speaker 1:
To make those decisions?

AJ Shepard:
Yeah, they do not have been in power. Yep. Again, we value our partners and all limited partners and investors and we definitely want to hear if they have a good idea or something that can be done better.
We will do all that we can to make the assets perform better, but ultimately the responsibility lies on us. For the other investors money. And so if one person wants something done that is out of the line with protecting and making sure that the other investor's money is protected, that's why we are the ones
that make these decisions,

Because we're trying to make decisions, we're incentivized to make better decisions and make the asset perform better. And so that's mostly passive. And again, happy to hear whatever they have to say.

Speaker 1:
And then last question, when you talked about the disbursements towards the end and you were breaking down right there. Yeah. So if the investor [inaudible 00:16:32] $50,000 made 17,500 over five years. Is that then once you sell it, that's where they get the 32,500 back as your initial investment and then anything on top of that is basically what they made above and beyond their initial investment?

AJ Shepard:
Yep, yep.

Speaker 1:
I didn't have any specific questions.

AJ Shepard:
Cool. Alan, Taylor, you guys got any questions?

Speaker 3:
None from me.

Speaker 4:
Nope. Nope. That sounds great.

AJ Shepard:
Good, that's I like to hear. All right. Let's stop recording.

Uptown Properties
Chris Shepard
3526 SW Troy
Portland, OR 97219
503-941-0276
Fairway Independent Mortgage Corporation
Mike Maier
5410 SW Macadam Ave, Ste 100
Portland, OR 97239
503-545-9879

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