Raised $310k of a $640k need. Lost the earnest money and the setup costs.

Small town, roughly 6,200 people, one large regional employer plus a hospital. 22 units in two buildings, $1.15M, in-place rents about 22 percent under what the newer product across town gets, physical condition tired rather than broken. I've owned small rural property for years and I've never syndicated anything, so this was going to be the step up.

Equity need was $640k. $402k down at 65% loan to value with a local bank that had already given me a term sheet, $140k capex, closing costs and reserves for the rest. Structure was plain: 8% pref, 75/25, 1% acquisition fee, no asset management fee for the first year because the fee on that raise would've been about $9k and I felt silly charging it.

I had verbal soft commitments of about $500k before I went under contract. What I actually collected in eleven weeks was $310k from six people. Three of the soft commitments went silent and one told me flatly he wasn't putting money into a town with a single major employer, which is a fair objection I should have heard earlier.

The contract went hard at day 30 after inspection with a 60-day close. I extended once for $8k, then couldn't fund. Lost the $25k deposit. Spent $18k on securities counsel for the offering documents and entity work and about $4k on a third-party market study. So $47k out, plus about seven months.

What I'd do differently. I'd get written subscription commitments, or at least funded escrow deposits, before letting a contract go hard, and I'd size the raise to the money I could actually see. I'd have run this as a three-person joint venture with two partners at $200k each instead of a securities offering, because at $640k the offering costs alone ate 3 percent of the raise before I'd bought anything. And I'd have asked the first five investors what would make them say no to a town of 6,000, before I paid a lawyer anything.

2 replies

2chriswalton8CC1CPRO8

The soft commitment decay rate is the part I'm trying to learn and your numbers are the clearest example I've seen. $500k verbal turned into $310k funded, so about 62 percent. Everyone I've asked says to plan on half of verbal, and you got a bit better than that while still coming up short.

The thing that would've scared me off too isn't the market, it's the exit. A buyer for 22 tired units in a town of 6,200 is either another local or nobody, and there's no way to tell an investor what the cap rate will be in five years because there aren't enough sales to build a range from. Did anyone ask you that directly, and did you have an answer?

Also, charging no asset management fee. I understand the instinct and I think it hurt you. It reads as though you weren't planning to do enough work to charge for.

3stephen_ok9CO2CPRO6

I'd have passed and it wouldn't have been about the numbers you sent me.

On a $640k raise the sponsor gets $11.5k of acquisition fee and no asset management fee in year one. So when a roof fails in month eight, the person managing it is doing it for the promote alone, four or five years out. That's a structure that depends entirely on the sponsor staying interested, and I can't diligence someone's future interest level.

@sable's point about the fee waiver is the same point from the other end. Charge the fee, show me the work it pays for.

The JV version you describe at the end is the one I'd write a check into. Three people, one operating agreement, everyone can call each other. At that size the securities structure is buying you the ability to raise from strangers, and you weren't raising from strangers. You were raising from six people you knew, and you paid $18k for the privilege of doing it the formal way (which I understand, since a lawyer would tell you that's what the formal way is for, and whether an offering needs it depends on facts and state law that I can't judge from here).

Sorry about the $47k. It bought you a real answer about what your investor base will and won't fund, which is worth something, even if it's expensive at that price.

Raised $310k of a $640k need. Lost the earnest money and the setup costs.

2 replies