How To Optimize The Multifamily Capital

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Raising capital can be a challenging process but with the right attitude and approach it can be a very rewarding experience Here to share expert insights on how to successfully secure funds is Roddrick Jones Chairman CEO and Co-Founder at Aparti Capital Markets Roddrick helps multifamily real estate investors raise a multifamily fund for their multifamily deals Today he dives deep into preferred equity partnering with institutions and what it takes to make a deal stand out and get the capital investment it needs Tune in to this value-packed episode 00 01 – 08 16 Preferred Equity Explained Roddrick shares how he got into real estate The work they do on Aparti Capital Markets Differentiating preferred equity from senior debt and mezzanine financing The role of a preferred equity partner Hard pref vs soft pref 08 17 – 24 08 Working with Institutional Partners Educating himself on the space The problem with institutions and accredited investors Getting in contact with institutions How Roddrick is able to make a profit Instilling confidence in the institutional partner It s all about the people and relationships What s the minimum deal size for Roddrick and his team to get involved The number one thing that sponsors can improve on A one-pager should have a high-level overview of the deal the executive summary the team returns NOI and exit strategy Pitch decks should be between 12-15 pages long and explain the one-pager in great detail Here s the truth Anyone can raise capital 24 09 – 25 06 Closing Segment Reach out to Roddrick Links Below Final Words Tweetable Quotes Everything is based around the person It s not based around how much you know It s based around have you done this before How long have you been doing it Where have you failed And how did you learn from that failure – Roddrick Jones Anybody can raise capital Anybody can do anything they want to do I want to dispel the myth and debunk the myth that larger deals are only for a certain select few – Roddrick Jones The truth is larger deals are for people who can go out there talk to other people think through tough situations and place the facts in front of others – Roddrick Jones —————————————————————————– Connect with Roddrick Email him at roddrick aparticapitalmarkets com or contact him at 7704215160 Follow him on LinkedIn Instagram and Facebook Connect with me I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns Facebook LinkedIn Like subscribe and leave us a review on Apple Podcasts Spotify Google Podcasts or whatever platform you listen on Thank you for tuning in Email me sam brickeninvestmentgroup com Want to read the full show notes of the episode Check it out below 00 00 00 Roddrick Jones Everything is based around the person It s not based around how much you know It s not based around if you can spit out projections It s not based if you can tell me all the market specifics It s based around have you done this before How long have you been doing it Where have you failed And how did you learn from that failure 00 00 19 Roddrick Jones And the sponsors are the people that drive that you know because it s it s lessons that you learn in business that you ll never be able to learn in the book It s lessons that you ve learned from running a property that you ll never be able to learn from a course And the sponsor haven t gone through that been through it then that s who the institutions are betting on the most 00 00 48 Sam Wilson Roddrick Jones helps multifamily sponsors do larger deals by providing them with access to capital Roddrick welcome to the show 00 00 56 Roddrick Jones Thanks for having me Happy to be here 00 00 58 Sam Wilson Pleasure s mine There are three questions I ask every guest who comes from the show in 90 seconds or less can you tell me where did you start Where are you now And how did you get there 00 01 05 Roddrick Jones That s a good question So my name is Roddrick Jones I started by wholesaling real estate realized that I wanted to buy multifamily real estate scaled up to start doing syndication heard some podcasts Start you know doing some syndications realized that I didn t like owner operating and then realized that I liked raising capital and placing capital with other sponsors Then I started raising money from institutions creating funds and taking those institutional capital providers money placing them into a fund and investing with other sponsors 00 01 37 Sam Wilson Interesting And is that what you guys do I guess tell me what what your business then looks like today What what does a Aparti Capital Markets do 00 01 46 Roddrick Jones Yeah so basically we are a discretionary capital provider meaning that we can act as a broker for our clients or we can act as a direct lender and a direct investor 00 01 57 Roddrick Jones And so we provide sponsors with senior loans that s bridge that s long term financing and that s Freddie Fanny all of the you know gambit of it And then we also provide sponsors with preferred equity investments and that s that s like a you hear it called preferred equity or mezzanine finance That s just the person that s acts as the senior lender And we normally go up to 85 of the capital second now 00 02 22 Sam Wilson Okay So when you say preferred equity break that down for our listeners just in case they don t know what is the difference between senior debt preferred equity Give us just the quick high level on that 00 02 33 Roddrick Jones Yeah So when you think of senior debt it s just like a bank loan So the bank is normally the person loaning you the money They ll give you 75 up to 75 of the capital And they re the first person to get paid Then if we take another step up that s where preferr equity plays So you have this normally called preferred equity or mezzanine financing 00 02 55 Roddrick Jones And the difference between preferred equity and mezzanine financing is that mezzanine places The second lean on the property and preferred equity places a lean on a partnership And then you have two types of preferred equity You have hard preferred equity and you have soft preferred equity hard preferred equity looks a lot like a loan and soft preferred equity looks a lot like you know common equity or joint venture equity 00 03 18 Sam Wilson Right right And so I guess that s that s a really interesting you know differentiation there between hard and soft Preferred equity you know understanding of of prep equity at this point was that yeah it acts more like a more like a second loan and less like actual equity And then you re saying that there are preferred equity partners obviously that come in and they re more of a true equity partner in the sense that they just participate in the deal just like a regular partner would is that right 00 03 45 Roddrick Jones Correct And the only difference is that their upside is capped So if they just participate in a deal like a regular partner would you would agree to how much they get paid up front You know so let s say that their return is gonna be 15 They re capped at 15 Now if the deal does phenomenal they re still capped at making 15 of their money 00 04 02 Sam Wilson Who is eligible for working with partners This cause this this is this is my again I ve not ever personally used preferred equity or or or dealt with this side of it so forgive my ignorance as we dig into this But it seems like by the time you re able to bring along deals that are large enough that a preferred equity partner wants to get involved you almost don t need them anymore Tell me why I m wrong 00 04 25 Roddrick Jones Okay so that is correct So you almost don t need them anymore That is correct But when looking at deals the minimum preferred equity check is about 5 million And so if you re looking at a deal and the minimum preferred equity check is about 5 million that means you have to be doing a deal that s at least 35 million and above 00 04 42 Roddrick Jones Right But when when it comes into play when you re looking at returns So let s say the senior lender stops at 65 and then you have to go and raise well let s say 75 to keep it even 75 and then you have to go and raise 25 Well maybe if you layer in a preferred equity investor at 15 and they take you up in the capital stack up to 85 00 05 04 Roddrick Jones Now you no longer have to bring 25 You only have to bring 15 of the And when bringing 15 of the equity yes that preferred equity investor gets paid on that equity However they may get paid a higher percentage of it or a higher portion And then but if you look at your common equity returns or your joint venture equity returns those returns are higher as well 00 05 25 Roddrick Jones So because you re bringing a smaller check you know you re bringing a smaller check to the deal and you re getting capital from another And that conduce your return some 00 05 33 Sam Wilson Right Because your preferred equity and again let s go back just to make sure I understand this right Your preferred equity comes in let s say you got a senior debt at 75 Your preferred equity comes in at 15 That means you ve only got 10 common equity Now your preferred equity might get a preferred return that s above your common equity They may get I mean tell me again if I m misunderstanding this but they may get 8 They may get 10 00 05 55 Sam Wilson They may get 12 And that might be where they stop They don t get above that Like when the once they hit their 12 return they re out of the deal Is that right 00 06 03 Roddrick Jones Correct And most people think they get 12 all up front So it s normally broken down in the half and half So they ll get six So let s say the return is 12 you know preferred equity investor writes your term sheet Let s say you get his return is 12 It s normally a current return and there s an accrued return And so current means how much you have to pay out right now Accrued means how much you have to pay out in the future once you close the or refinance the deal or sell the deal So normally the current return is 6 or half 00 06 30 Roddrick Jones And then the accrued return is 6 which brings them up to a total return of 12 So that way it doesn t kill the deal when you know you still have to run the property and make sure investors your common equity investors get paid too 00 06 41 Sam Wilson Right Now when do you have to pay pref equity Is it like does it function like a preferred return in the sense that it is you know it accrues but it s not guaranteed or is it something where it s like a bank loan and that if you don t pay your your pref equity their 6 let s call it in this in this example then they can foreclose What s that look like 00 07 05 Roddrick Jones Yeah So the answer to the question is it depends But it depends on whether you re getting hard pref or soft pref and it also depends on what you re negotiating And so if it s hard pref once you don t hit the so normally hard pref terms go after senior loan gets paid then the preferred equity investors get paid 00 07 25 Roddrick Jones And if you can t hit your preferred equity investor payment then there s some rights and remedies or there s something where some carve out where it s like if you don t hit it then we will foreclose on a partnership And then once we foreclose on the partnership then we become the sponsor and we are responsible for the senior loan 00 07 41 Roddrick Jones That s there just in case it ever happens Do preferred equity investors want to do it No because you know they re not in the business and we re not in the business of running properties We re in the business of picking the right people to to do their job and you know help them give them some capital so they can run with their dream But once we become the you know if we ever take the property back and we become the holders of it the deal will immediately go down because we don t know how to run properties We only know how to look at it from a financial perspective 00 08 08 Sam Wilson Right They are in the in the money business not in the running multifamily projects or properties business I get it entirely How did you educate yourself on this space I mean it s a lot of transition wholesale to multifamily to syndications found out you didn t want to be an owner operator And then you found out Hey I can raise capital from institutions 00 08 29 Sam Wilson And then you said oh man you know what even better yet I can help broker capital from institutions to other you know multi-family operators How did you educate yourself on that space And what did you do to break in 00 08 40 Roddrick Jones Yeah So I started by listening to podcast I was a podcast junkie listening to everything I could get my hands on Reading books and then I actually met a guy He was an ex-Wall Street investment banker He showed me the ropes you know so he showed me the ropes It was very tough love like do this And if you don t do this don t call me again So I m like okay I ll do it You know so I do it and I you know I get better and better at it over time but I actually met him 00 09 05 Roddrick Jones I got my Series 65 And I said okay I m going to take this you know serious This is what I m doing from here on out And so it was podcast meeting the guy and then after that it is school of hard knocks just going to you know going and beating your head against the pavement until you figure something out 00 09 23 Sam Wilson Gotcha So yeah I mean that s the question is I guess how did you convince let me ask this how did you convince your institutional partners that Hey you know I have the skill set in the wherewithal to connect you with the right people doing the right deals And you guys will be good fits for each other especially maybe in the sense that you didn t have a background in that space I mean like you said ex-Wall Street investment banker like that s that s outside of my league at this point So how did you do it 00 09 53 Roddrick Jones Yeah So it s actually we make it more complicated than what it is you know And so when I was syndicating deals I was doing deals between I would say 25 and a hundred million Anyway that s the kind of deals that I was looking at So I m like Hey there s a lot of other people just like me that you know want to do these ties deals And so I started by raising money from accredited investors and realized that accredited investors are not as reliable as institutions and institutions the problem is most deals don t pencil out because the check size is too small And so once I realized that I said okay institutions have a problem just like accredited investors have a problem The problem with institutions they can t find deals check out is too small So I said okay let me call institutional investors and see what type of deals they re looking for 00 10 40 Roddrick Jones And so the first step you know what I did in the past I would go and find deals first and then present em to investors Whereas the first step now was to call institutions and figure out what they re looking for and then turn around and go and find the exact deals that they re looking for and place it in front of them 00 10 55 Roddrick Jones And so in order to get in contact with the institution they have something called an acquisitions department So you go to the acquisitions department and you call the acquisitions associate So the titles that you re looking for is associate business development VP of business development or associate those two titles will get you what you need 00 11 14 Roddrick Jones And so you you connect with them and you Hey my name is such and such If you re a sponsor you tell em you re a sponsor If you re a a broker you tell em you re a broker If you re a advisor you tell em your advisor So you say Hey my name is this I m a capital markets advisor We have sponsors that have need for debt and equity that exceeds what we re able to do for them 00 11 33 Roddrick Jones What are you guys looking for Or what are you guys looking to place some capital so that way I can place these opportunities in front of you And then from there they tell you And it tell you like in great detail too it s just like wow Okay All I had to do was this 00 11 47 Sam Wilson How do you and I m and I m sorry for digging in your business here a little bit but I think it s important for anybody that s thinking about this and even just getting a a a high level understanding of of how these deals are put together which everybody s got to get paid in this business Otherwise there s no really I mean there is reasons for doing it but if we don t make money there s probably not not a lot of motivation 00 12 08 Roddrick Jones We re for profit 00 12 09 Sam Wilson We are for profit Absolutely I am for eating as well So I you know I m all about putting food on my table Tell me how did you figure out how to monetize that Like you said okay cool I ve got you know Sam over here at the Brien investment group and he needs he needs 10 million bucks and I got this guy that wants to place 10 million bucks What d you do You say all right I m going to connect you guys And then one of y alls got to pay me 00 12 31 Roddrick Jones Correct So in a way yes All right So it s two things So if you if I m doing debt and I m broker in debt then yes I will have a a sponsor sign an engagement letter And this engagement letter says Hey you re using me to go out and find debt in the marketplace on your behalf And in exchange for me doing this I m gonna charge you 1 origination fee 00 12 55 Roddrick Jones And then the sponsor s like okay I agree with that So then once we close on the deal then I get 1 of the loan amount And that s just clear as day But if the sponsors don t want to sign that engagement letter I don t work because it s like you know going to find a deal and you know not getting it under contract and then going and you know marketing to your investors 00 13 17 Roddrick Jones It just doesn t work that way If you don t have it under contract anybody can swoop behind you and take the deal and they can you know legally buy the deal So it s the same thing with capital advisors and brokers If they don t if you don t sign an agreement with them they have no incentive to go out and do a deal on your behalf 00 13 31 Roddrick Jones Now Second half is the equity So when we re doing equity I m just putting together to fund myself and then I m investing those funds with the sponsor So be what you call a special purpose fund or a fund to fund Yeah And so then it simplifies everything because one in order to get paid for raising common equity or equity for on behalf of a sponsor you have to be a broker dealer and I m not a you know attorney or anything like that 00 13 57 Roddrick Jones So go and look it up but you have to be a broker dealer and you have to You know go through all the phases and go through all the license So that way you can legally get paid for bringing equity to a deal And so the reason we do fund to funds fund to funds or raise funds because it simplifies it 00 14 13 Roddrick Jones It simplifies it because one we can raise the equity and we can invest it into the sponsor And the sponsor only has to deal with one person And that is us And then from there we get paid from the fund The sponsor doesn t have to worry about paying additional fees or anything like that They just pay the fund The fund pays us 00 14 30 Sam Wilson That s really cool I love that you figured out a way to bring a large check you know from one maybe two investors when you just set up the fund to funds model When you do that how do you instill confidence in the institutional partner that Hey you re making the right bet on the right deal 00 14 48 Roddrick Jones Yeah So the number one thing that we look for so we look at the sponsor first and then we look at the deal second So it s all about people You know it took me a a while to realize this everything is based around the person It s not based around how much you know it s not based around If you can spit out projections it s not based 00 15 06 Roddrick Jones If you can tell me all the market specifics it s a base around have you done this before How long have you been doing Where have you failed And how did you learn from that failure And the sponsors are the people that drive that you know because it s it s lessons that you learn in business that you ll never be able to learn in the book 00 15 25 Roddrick Jones It s lessons that you ve learned from running a property that you ll never be able to learn from a course And the sponsor having gone through that been through it then that s who the institutions are betting on the most or that s what we re looking at the most Then we re looking at the deal And if the deal makes sense then it s like a green light 00 15 39 Roddrick Jones But if the sponsor doesn t make sense and the deal doesn t make sense then it s It s a no you know but if the deal makes sense and the sponsor doesn t make sense we can say okay this deal works but we don t like the sponsor Can you go and partner with another sponsor So that way it ll make everybody feel more comfortable or bring an advisor on and put the deal together that way 00 15 59 Sam Wilson Got it Now that s an interesting point You brought up there I guess there s one question I have on that When you set up a fund to funds how do you do you get a side letter agreement with the sponsor where they end up paying you Or do you have it set up where like you said you take you take your returns straight out of the fund 00 16 17 Sam Wilson And and I m asking a lot of questions here all at once And if if that s so why does the deal sponsor want to go through you Because it seems like you re diluting the returns that they could otherwise get if they just went straight to the sponsor 00 16 28 Roddrick Jones Right So that is a two part question So the first part is the side car Yes So the sponsor can give a side car or a side letter that says Hey you know being that you re bringing a larger check we will you know charge you only 1 asset management fee and we ll charge you a 1 acquisition fee instead of 2 So basically like cut the fees in half 00 16 49 Roddrick Jones So that helps us as far as getting the better return I mean getting better terms from the sponsors because we can bring a larger check right now on the other side with the funds with the institutional investors they can go straight to the sponsor but at this moment they cannot go straight to the sponsor 00 17 07 Roddrick Jones Why Because we ve already issued a term sheet to the sponsor And if they were able to go straight to the sponsor the sponsor would ve went straight to them in the first place You know obviously the sponsor doesn t know that they have the capital to I mean to place in because most institutions don t advertise that they have capital to to lend 00 17 25 Roddrick Jones They mostly work with intermediaries Instead of calling us brokers and capital brokers they call us intermediaries So they mostly work with intermediaries to get their capital out And so if the sponsor can realize that Hey you know I can be considered an intermediary and just be a direct investment from the from the firm 00 17 42 Roddrick Jones He can do that too So it s all about relationships you know so that they they invest into our deals because they know that we have you know more deals coming and we have access to sponsors And the sponsors can go straight to the institutions and having the direct investment relationship as well And it s just you know it just depends on who you know and how you do it 00 18 01 Roddrick Jones And that s why I said it s not about like really knowledge this is all about people Just meet a lot of people and then you can figure stuff out It is just crazy that you can do that 00 18 10 Roddrick Jones What dollar amount for you and I know it s all this is all subjective you know or or subject to whatever it is you re working on But for you what is the minimum fund of funds deal you will put together 00 18 22 Roddrick Jones Yeah So acquisition the price of the deal has to be 25 million or above That means that you know you ll need a loan of 15 million and you ll need some preferred equity investments of 5 million I think it might be 3 million You ll need prefer equity about 3 million So I would say you ll need about 18 million in in proceeds 00 18 44 Sam Wilson Right Right Got it So 25 million and above is where it makes sense for you to get involved with somebody I think that s helpful as people are listening to this if they re saying Hey I wanna get a hold of Aparti Capital M arkets and figure out what you know how they can help just know that that s kind of your that s kind of your minimum deal size before you know you guys can get involved and really help 00 19 01 Roddrick Jones Yeah But I would also say I have a heart and that s the bad part that I don t like You know I don t like that I have a heart So I I you know my my minimum is this and you know on a select deal by deal basis I will help other people too So if I can do it if I can introduce anybody to anybody I m willing to do that 00 19 18 Roddrick Jones If you know the it s the same process for doing bigger deals as it is for doing smaller So I may not be able to help you with preferred equity if you you know have a smaller deal but I may be able to help you with the debt you know may be able to help you broker some debt out or something like that 00 19 31 Roddrick Jones Any way I can help I m going to help But you know if you have a deal and it s like can you get this done And it s like 25 million I m like yes I can get that done That s easy We do that our sleep But if it s other deals we just figure it out It s a it s a brain game at that point Got it man I love it 00 19 46 Sam Wilson Tell me you know what are some things you see people doing poorly that they could do better when they re talking to either intermediaries like yourself or when they re talking to institutional investors and things like that what are some things that you feel like deal sponsors could do better than they re doing right now 00 20 03 Roddrick Jones Yeah So that s a good question So the number one thing that I see sponsors could improve on is having a pitch deck and having a one pager So the sponsors assume that when dealing with larger check writers that they you know know the know the numbers and they can analyze this deal left and right you know through and through 00 20 23 Roddrick Jones They see a lot of deals every single day And so in order for your deal to get pushed through you have to have at least a one pager a high level overview of the deals This is the deal This is the executive summary This is the team These are our returns This is the current NOI pro forma NOI sources uses exit strategy 00 20 40 Roddrick Jones This is you know when we re looking to have this deal funded and this is you know when we plan on selling the deal something like that It s the one pager and then having a pitch deck as well That explains that one pager in great detail And so great I don t mean have 15 or 50 pages I mean have like you know between 12 to 15 pages or 12 to 14 pages something like that 00 21 03 Roddrick Jones And it walks through and it tells a story This does two things One it shows that you re sophisticated enough and you take enough time right to think through your investments And two it helps the investor think about the deal the way you re thinking about the deal Because if you just send numbers over everybody will come up with numbers different numbers by looking at the same numbers 00 21 25 Roddrick Jones But if you send numbers over with the story behind those numbers then it helps people see through the lens that you wrote through Hey I see this deal I see exactly what he s laying out I see that this can happen this this and this and it can hit these returns over this period That s the number one thing they don t you know you don t have a pitch deck 00 21 40 Roddrick Jones You don t have a one pager and you re wondering why you know institutions won t call you back If they have to think through the deal for you then they re not going to do it because it s like I can just do this deal Why would I you know why should I take the time to think through it if you haven t even thought through it 00 21 53 Sam Wilson Right I love what you put there on the on the one pager and of course you can look for that here in the show notes as well on the website when you come back through if you want to go back and reread the points that Roderick just made that should be in that one pager I mean those are things that it s like it s the bottom line front like this is the bottom line up front 00 22 10 Sam Wilson And that I love the idea of making those two separate documents because man I ll be honest with you I get really bored looking through you know these these pitch decks that are you know 15 20 pages long and it s like all about you and your grandmother and how much you like to play golf 00 22 25 Sam Wilson I don t really care Like give me the bottom line up front and I m either gonna round it and I m be like Hey that s a cool deal Let s look at that further So I like what you said there This has been super helpful You ve given us just an enormous amount of information on really I think a a more nuanced side of you know capital raising and investing I mean this is not something that I think everybody has really gotten into or even understands very well I mean I ve done this I don t know 500 And what is this episode I don t know what this will be 550 570 somewhere in that neighborhood 00 22 56 Sam Wilson And I don t think we ve had anybody come on the show that really talks about what you re doing today So I certainly appreciate it Thanks for taking the time to break this down Are there any other thoughts or things that surround kind of your business that you feel like our listeners should know 00 23 08 Roddrick Jones Yes Number one thing is that anybody can raise capital Anybody can do anything they want to do So one thing I want to do is dispel the myth and debunk the myth that you know larger deals are only for a certain select few Larger deals are only for ex-Wall Street investment bankers or ex-fund managers or ex whatever It is not true 00 23 34 Roddrick Jones The truth is larger deals are for people who can go out there talk to other people think through tough situations and place the facts in front of others If you can read write add and multiply Or add and subtract You can do larger deals Only difference is the zeros that you add behind it And you know it s I m not special I m just another person Anybody you talk to is just another person We all breathe We all bleed We all have emotions If you remove that and just get out of your own way you can do anything you want to do 00 24 09 Sam Wilson Roddrick preach it I love it Thank you so much for coming on today If our listeners wanna get in touch with you or learn more about you what is the best way to do that 00 24 16 Roddrick Jones Yeah So number one way you can shoot me a text message 7 7 0 4 2 1 5 1 6 0 Or you can reach out to me via email roddrick aparticapitalmarkets com or you can hit me up on LinkedIn roddrick Jones Facebook Roddrick Jones and Instagram Roddrick Jones 00 24 33 Sam Wilson Wonderful We ll make sure to put all of those links there in the show notes Roddrick thank you so much for coming on today I do appreciate it 00 24 39 Roddrick Jones No problem Thanks for having me Click here to visit this podcast episode