Real estate investments are comprised of two types of parties, General partners (GP) and Limited partners (LP). General Partners are typically asset managers. They are responsible for managing the property themselves or via a third party. Limited partners are passive investors who do not make decisions about the day-to-day operations of the property or a property's management.
Preferred return is a designated amount of distributable cash to be returned to the investor before any return splits. For example, if a deal has a preferred return of 8%, then the first 8% returned on an investment (distributions from cash flow or capital events such as refinance proceeds or disposition) will go entirely to the Limited Partners.
The internal rate of return (IRR) is a measure of an investment's rate of return. The term internal refers to the fact that the calculation excludes external factors, such as the risk-free rate, inflation, the cost of capital, or various other financial risks.
IRR is designed to account for the timeline of investments. A given return on investment received at a given time is worth more than the same return received at a later time, so the latter would yield a lower IRR than the former.
The equity multiple is defined as the total cash distributions received from an investment, divided by the total equity invested. For example, if the total equity invested into a project was $1,000,000 and all cash distributions received from the project totaled $2,500,000, then the equity multiple would be $2,500,000 / $1,000,000, or 2.50x.
An equity multiple less than 1.0x means an investor is getting back less money than invested. An equity multiple greater than 1.0x means an investor is getting back more money than invested. In the example above, an equity multiple of 2.50x means that for every $1 invested into the project, an investor is expected to get back $2.50 (including the initial $1 investment).
The split is how the returns are allocated between the GP and the LP after reaching the designated preferred return. If the split is 70% to the LP and 30% to the GP, after the preferred return is paid, then the LP and GP split all other proceeds from distributions or capital events 70/30.
That split can change if a certain hurdle (or waterfall) is achieved. Example: A split could be 70/30 then go to 50/50 once the IRR hits 18%. Any returns higher than 18%, will then be split 50/50 LP/GP. The changing of the split by hitting milestones is a waterfall.
Funds can be wired directly into the subscription account of the fund. The funds are typically held in an escrow account in the name of the LLC until the closing of the property. BAM Capital never takes possession of an investor's funds.
First and foremost, BAM would do its best NOT to sell in a down market. Instead, the goal would be to continue to pay the preferred return and hold on until the market returns to a healthier state. Although there are no guarantees; class A-/B+, value-added assets are better positioned to withstand down markets due to the continued need for affordable housing.
No. To invest in these assets, an individual, couple, or entity needs to attest to their status as an accredited investor. BAM's offerings are classified as 506c and governed by SEC regulations. Therefore BAM must receive third-party verification for all investors. Self-accreditation is not sufficient.
An accredited investor is someone who meets certain requirements regarding income and net worth, based on Securities and Exchange Commission (SEC) regulations. This is to ensure that investors participating in private funds display a certain level of financial sophistication when evaluating potential offerings.
To be accredited, an investor must satisfy at least one of the following:
Yes. It would simply entail a slight difference in how an investor signs the subscription agreement and fund the deal, with no added degree of difficulty. There are some things to consider, however, such as the UBIT (unrelated business income tax), which is why BAM recommends seeking the counsel of a CPA, licensed financial advisor, or other trusted, licensed advisors.
Regardless of the entity chosen for the investment, it will still need to be verified as an accredited investor. For example, a multi-member LLC would need to have all members verify their status as accredited investors.
Typical projected returns metrics are as follows:
Distribution frequency is project-specific and dependent upon the specifics of each operating agreement. Lenders govern some distribution schedules, and the timing can be monthly, quarterly, semiannually, or annually. The BAM Fund makes monthly distributions
Updates sent to investors vary by firm. Some firms provide information quarterly, semiannually, or even annually.
BAM sends statements to investors quarterly. They will be accessible from the investor portal. Any additional announcements that are made; refinance updates, disposition updates, etc. would be sent via the investor portal as well.
All fees are separate from return projections. This means that fees will have no impact on the return projections seen in any of BAM's deal decks; the LP's are not paying any fees "out of pocket."
Sponsors most often make their money in three ways:
Good sponsors invest alongside LP's in their deals. If a Sponsor does not co-invest, their interests may not be aligned with the investor. If a sponsor has put together a strong deal, they should want to share in the success of a project. Sponsors often participate in multiple deals throughout the year, which is why sometimes their share in a given deal may seem "small." Further, most Sponsors are also the loan guarantors and require some liquidity in their personal balance sheets.
BAM invests in its deals alongside with investors. A small portion is contributed by the sponsors to illustrate the belief in and alignment with BAM's offerings.
No. By their nature, real estate investments have a longer-term time horizon than that of stocks or bonds. However, deals do allow for the sale or transfer of an interest in an investment. Each deal's operating agreement will specify what needs to be done for the process to be completed.
The exit strategy for these investments is generally five to seven years, although it may vary depending on the property and specific business plan being executed. Changing economic circumstances can also affect the original hold time, so passive investors do need to place a certain level of trust in the management team to make decisions that will maximize all investors' returns. Original timelines will be adhered to as much as it is possible to protect everybody's investment.
Similar to 1099, a K-1 form is an accounting of the tax income for the year. Each investor receives one per investment. K-1 forms are most commonly used in partnerships and in real estate ownership.
A 1031 exchange involves reinvesting the proceeds from the sale of one property into another project within a certain timeframe to avoid paying tax on capital gains. To put it simply, this strategy allows an investor to "defer" paying capital gains taxes on an investment property when it is sold, as long another "like-kind property" is purchased with the profit gained by the sale of the first property.
BAM investors cannot 1031 into BAM's deals since they are purchasing units of Limited Partnership and not the property itself.
Due to the nature of value-add syndication, it is very common to create significant value in property through renovations, tightening operational efficiencies, etc. In the case that this is achieved, the sponsor may consider going back to the bank with a now higher assessed property value and either refinance the property or obtain a second/supplemental loan. The choice between the two depends on market conditions and what interest rate can be obtained vs. the current interest rate. This allows the sponsor to pull out equity and return it to investors, tax-free.
While there is dilution (8% pref now based on the remaining equity in the deal as opposed to initially invested equity) typically associated with an equity event, the event also increases the cash-on-cash (CoC) & IRR on the project.
The main reason managers refinance property is to take advantage of the savings from a lower interest rate and longer loan terms, which simultaneously reduces long-term debt as well as monthly payments. BAM can also take out tax-free cash to renovate the property or distribute capital back to investors.
When a mortgage is first taken out, whether, through a refinance or a home purchase, the balance of the loan is at its highest point. That means the amount of interest to be paid on the loan is also at its highest point.
A 30-year mortgage has 360 monthly payments. If a borrower took out a $360,000 mortgage to buy a home, and it was not amortized, each month's payment would include $1,000 in principal paydown, plus the interest due on the balance.
It would quickly become a hassle to pay a different amount each month. Amortization fixes this problem by only paying a small portion of the principal balance at the beginning of the loan term and a large portion at the end. This way, the payments balance with the large interest portion of the payment at the beginning, and the small interest portion at the end. All the while, the monthly mortgage payment of principal and interest remains the same.
A private real estate company (the sponsor) establishes a Fund with certain parameters, then raises money from investors to capitalize the fund. The sponsor uses the capital to make investments under the fund. The money can be deployed anywhere in the capital stack; funds can be used in the mezzanine debt, bridge loan, or senior loan positions of the capital stack. It all depends on what is established in the private placement memorandum (PPM). A fund allows an investor to spread the risk of the investment across all future deals instead of putting it all in a single deal.
The obvious benefit of a Fund is diversification. The investor in a Fund is instantly diversified across multiple assets. A Fund portfolio can contain 10 to 20 separate investments spread across a broad geographic area, which can lower risk, compared with just owning a single asset. The other better performing properties mute the effects of a poorly performing deal.
With a REIT, an investor commits money upfront before the properties are purchased and, most of the time, don't know what properties they are invested in.
The theory is an investor buys a diversified pool of properties, but in practice, REITs don't start with a pool of properties, and they must start paying dividends to their investors. So, REIT managers have the propensity to invest in properties quickly to generate dividends to pay the investors.
Instead, an entrepreneur-run private equity Fund seeks property that provides all the conditions of a great investment; cash flow, location, job growth, rent growth, and view of the future so an investor can exit with a profit. Investors' funds will not be collected until a favorable deal is sourced, and then a capital call will be placed.
Investors will commit a certain amount of capital through the subscription agreement. When BAM issues a capital call, they will be obligated to contribute all or a portion of the committed capital. When sponsors compete on assets, there is always the risk that the deal may fall through. On a single-asset investment, if the sponsor cannot raise sufficient capital to fund the equity payment, they must withdraw. Fund structures have the benefit of committed capital, or dry powder ready to go. This may be cash on hand or available on short notice through capital calls.
An investor's capital will be called once BAM is ready to close on an asset. Once the capital is deployed, the preferred return will begin to accrue. BAM aims to start distributing a preferred return for each new round of the fund within 90 days of deploying capital and acquiring an asset.
For example, an investor whose funds were deployed in July would expect to begin receiving their preferred return no later than the following October. This allows BAM the time to acquire and stabilize the property.
No. An investor's money will stay in the fund for the life of the fund. It is possible to transfer ownership of the shares in the fund, but they are not redeemable until the end of the fund's operational cycle.
No, the assets in the fund are not cross-collateralized. Each asset in the fund has its own operational procedures, and their financial operations remain separate.
No, the fund is not an Evergreen fund. It allows 24 months of capital raising with an expected hold time on each asset of 5-7 years. The fund does have the ability to go longer based on market conditions to ensure that BAM does not sell in a down market.