HOW PRIVATE EQUITY FIRMS ANALYZE DEALS:

Most important metrics: 1. Stabilized cap rate (yield):

Since we focus on value add, the entry cap doesn’t matter, as long as we can service our debt

The stabilized yield matters because it shows the intrinsic cash flow of the deal

The stabilized yield is the stabilized (post-renovation) NOI divided by all the costs in the deal

Very simple calculation (see below for an example) but very important

We typically need to get to at least a 150 bp spread between the stabilized yield and the market cap rate for a deal to pencil (ex if market cap rate is 5%, need a minimum 6.5% stabilized yield)

For example, buy for an in-place 4 cap, increase revenue to get to a 6.5, sell for a 5 cap. If you buy for $10MM with an NOI of $400k, put in $2MM in renovations and bump the NOI to $780k, you stabilize at a 6.5 yield ($780k/$12MM)

Property is then worth $15.6MM ($780k/5% market cap), for a profit of $3.6MM

Speed matters as well (quicker the better for IRR)

Stabilized yield is a more important metric than IRR because it displays the intrinsic value of the cash flow

Whereas IRR is a bet on the state of the capital markets (debt financing available) at sale as well as cap rates at sale, which basically makes it a total guess

One of the biggest places beginners get tripped up is the property tour

They don’t know what to look for and they don’t know what anything costs

Here’s what to look for when touring a property so you can accurately price the renovation costs: Generally a renovation for a Class C 1-bed unit costs me $15k-$20k

Below are the items I focus on when touring to maximize rent and minimize cost

You should think about the property in the 3 categories outlined below
1. Bathroom (~$5k)
2. Kitchen (~$8k, grouping in all appliances & materials)
3. Floors/Paint/Other (~$2k)

Let’s say you’re looking to buy a real estate deal and want to use a community bank for the financing

These lenders will be looking to make sure you satisfy 5 main requirements in order to fund your deal: The 5 lender requirements are:

- within “the deal itself”
1. DSCR at or above 1.25x
2. LTV at or below 75%

- regarding “you as a borrower”
3. Net worth = loan amount
4. Liquidity = 10% of loan amount
5. Adequate experience (your “REO” schedule)

Let’s start off with what banks look for in the deal itself

Calculating property taxes in 3 simple steps:

1. Look up the property tax bill
2. Go to the county website
3. Call the assessor

Follow this step-by-step process and you'll never miscalculate property taxes again: 1. Look up the Property Tax Bill

First you're going to go on the county website (go on google and search "xx county property taxes"). From there, you input the property address and the tax bill should come up

The tax bill should show you the exact calculation. You then recalculate the property taxes based on the new purchase price

Generally it's assessed value * the mill rate (ex if you buy for $1MM and the mill rate is 25, your taxes would be $1MM*25/1000 = $25k). Sometimes it's appraised value * x% to get the assessed value, then assessed value * the mill rate.

Most of the time, the assessed/appraised value is the purchase price, but not every time, especially in non-disclosure states.

Some counties also recalculate property taxes every year, while other counties only do so every 5 years. Some states only recalculate at sale.

Almost every county calculates the property tax formula slightly differently, so the exact formula isn't important. What is important is that you follow the formula for that specific county to the "T".

There are 3 main debt metrics in real estate:

1. Debt Service Coverage Ratio (DSCR)
2. Loan to Value (LTV)
3. Debt Yield

Here’s how to view each from both a buyer’s perspective & a lender’s perspective: // DSCR //

Definition: The DSCR is the ratio between the net operating income (NOI) from the property & the debt service associated with the loan

Formula: NOI / Debt Service

Example: A property has an NOI of $100k/yr & a debt service (inclusive of principal and interest) of $65k/yr. $100k / $65k = 1.67. So we would say the DSCR is 1.67x which is healthy - the property can easily service its debt

Buyer Perspective: This metric is probably the most helpful to understand how risky your deal is. It essentially asks the question: can the cashflow from the property satisfy the debt payments? If the answer is no & the DSCR is below 1x, you’ll need to come out of pocket to pay the loan, which is obviously a disaster. A deal like that inherently carries quite a bit of risk & you can lose more than just your initial investment

Lender Perspective: A traditional bank will likely not be interested in providing a loan unless the DSCR is at least 1.25x. Remember, the DSCR is inclusive of the principal payment, so even if you’re in an interest only period, the lender will calculate the DSCR as if the loan is amortizing. If you know the DSCR will be below 1.25x you will likely need to find a bridge, or hard money lender who specializes in transitional properties to give you a loan (or lower the leverage).

1. Go to tertiary market
2. Find a product type that’s profitable to build
3. Check zoning code and figure out the zoning that allows for that product type
4. Reach out to every property zoned for that use but currently operating as a *different* use
5. Buy, profit

// THREAD // This takes the “off-market property” strategy one step further

The issue with most off-market strategies is that the owner actually has some idea of the value of the property

For example, most owners know approximately what a multifamily property should be worth in the area

That’s because of three reasons

1. They can base the value off the in-place cashflow
2. They can base the value off comps (and there’s always a ton of multifamily comps)
3. They can call up a broker to tell them what the value should be (and the broker will actually know)

Why you should almost always offer more concessions up front in exchange for higher rent:

// Thread // For those of you who don’t know, concessions are simply additional incentives to get tenants to lease a property

An easy example is offering free rent

Since concessions are a “one time expense” they aren’t typically “capped” (used in the NOI that’s divided by the cap rate to determine the sale price) at sale, but the top end rent figure always is

One high water market rent increases the value of the entire building

When your DSCR doesn't hit the bank’s threshold (usually a ~1.25x DSCR), most people think banks don't give you any option but to lower the LTV

But in reality, if you negotiate, you have 3 options: Option 1: Lower LTV
Option 2: Schedule an earnout once 1.25x DSCR is hit at implied ~75% LTV
Option 3: Fund reserves up front to artificially hit the 1.25x DSCR

Almost everyone goes with option 1, but it's actually the worst option by far

Let's go through them one by one

For this entire thread, let's assume you want 75% leverage, but the bank is pushing you towards 60% leverage because that's the leverage that supports a 1.25x DSCR at the projected Yr 1 NOI

One of the biggest places beginners get tripped up is the property tour

They don’t know what to look for and they don’t know what anything costs

Here’s what to look for when touring a property so you can accurately price the renovation costs: Generally a renovation for a Class C 1-bed unit costs me ~$15k

Below are the items I focus on when touring to maximize rent and minimize cost

You should think about the property in the 3 categories outlined below
1. Bathroom (~$5k)
2. Kitchen (~$8k, grouping in all appliances & materials)
3. Floors/Paint/Other (~$2k)

One of the biggest mistakes I see beginners make is not understanding the market cap rate

If you don’t understand how the market values the property (the market cap rate), you’re going to lose money

Here’s why: Real estate properties are sold based on the value of the future cash flow

The cash flow is valued based on the cap rate (NOI / purchase price)

Higher the cap rate, the less valuable the cash flow stream (the property). Lower the cap rate, the more valuable the cash flow stream

You need to understand exactly how the market values the cash flow stream of the property you’re going to buy

Because you need to make sure that you’re not paying too much for it

If you pay too much for it (buy at too low of a cap rate), you lose money the day you buy it

How to analyze real estate beyond the numbers:

Real estate isn't just numbers in excel

It’s living & breathing

Here’s what to look out for... First thing most investors do when they see a deal is open excel and look at the numbers

“What’s the cap rate?”

This is extremely stupid. You’re not buying numbers in excel, you’re buying real estate

If you buy solely based off numbers, you’re going to make a costly mistake

It’s actually pretty simple.

Over the last 3 years, a lot of inexperienced operators got in over their skis.

So you’re simply going to target them: 1. Position yourself in lower liquidity markets (markets where owners will have trouble selling an underperforming asset quickly – that likely means a discount for you as the buyer)
2. Look for properties with a loan maturity coming up in the next 6-12 months
3. Look for properties that’re owned by an inexperienced individual (not a private equity firm)
4. Look for properties with low in-place income that the owner is probably struggling with, banks in the area won’t have the appetite to lend on and most buyers will be too lazy to perform the work on (most buyers are looking for “easy” properties)

Here’s exactly how I analyze a real estate deal:

This deal is a perfect example of clear signs you can look out for

This 68-unit deal arrived in my inbox about a while ago with 5 massive red flags 1. The deal wasn’t listed on loopnet (came straight from a not-that-well-known broker). Means 90%+ of the market didn’t even see it
2. The location was not disclosed in the text of the initial email. Anytime there’s any sort of “effort barrier”, that further reduces the buyer pool
3. The link in the email directed you to an old listing. Another “barrier to entry” and also proof of an incompetent broker
4. The financials provided were horrible. Most notably, the broker underwrote essentially the same rent for the 1-bed and 2-bed units, which is obviously not true. This led to the broker’s proforma revenue being significantly lower than the actual market revenue, which presented an opportunity (most unsophisticated offers came in too low because they were relying on the broker’s numbers)
5. The asset was operating with higher-than-market vacancy with 5 evictions currently in motion (way too many). I know the market and this made it clear the owners were significantly mismanaging the asset

Basically there were clear signs of broker incompetence and owner mis-management. That means the deal is definitely worth looking into

Now let’s get into the deal itself

In your career, every decision needs to be made with an end goal in mind

If you don’t have an end goal, you’re wasting time and energy. This is what most people do

They float around aimlessly until they’re forced to make a decision. You want to do the opposite

// THREAD // Your first step is figuring out your end goal. And that means answering the question “where do I want to be in 10 years?”

This isn’t a decision you should take lightly but it’s one you need to make

It’s legitimately impossible to make effective career decisions without first knowing where you want to end up

I get asked for career advice all the time - “should I take xyz job or zyx job?”

And the first thing I ask is always “what’s your end goal?”

I own over $30 million of real estate

I bought my first deal with $2,500 of my own capital

If I had to start over in 2025…

Here’s how I’d find a market in just 4 steps: Step 1: Look for cities/towns under 250k population
Step 2: Vet supply
Step 3: Vet demand
Step 4: Make sure there are mispricings

Probably the most common question I get from younger guys is “How would you do it all again if you were my age?”

I’ll do you one better. Here’s an extremely realistic gameplan to get from ~$0 to $1MM in 5 yrs

I’m going to assume that you have a W2, are roughly 22 and have limited capital coming out of college

We’re going to get you from $0 to $1MM in just 3 deals // Deal 1 //

You’re broke and have no skills. Everyone was here at some point. You can either whine about it or you can get moving

Reason most people think making money is hard is that they focus on how hard the end goal is (making $1MM) instead of focusing on the first step of the process – gaining the knowledge necessary to start making money

This first deal doesn’t matter at all. The only reason it matters is to “get you in the game”. Once you buy a deal you start accruing market knowledge, you start accruing relationships (lender, investor, broker, etc) – you start to become “dangerous”

You obviously want it to be a good deal but it doesn’t need to be a *great* deal. Because the purpose isn’t to make money, it’s to gain knowledge/skills/relationships so you can make real money on future deals

So what does this mean in a practical sense?

Step 1: Figure out how much equity you either have yourself or can raise

I was literally dead broke for my first deal so was only able to put $2,500 of my own money in. I reached out to my entire network and was only able to gather ~$100k. That wasn’t enough to buy a triplex all cash in my market (which is what I was targeting)

So I reached out to friends who could possibly partner up in the deal. Meant splitting the profits but didn’t matter to me. Was going to do whatever it took. If I needed to take on 10 more partners, I would have. It wasn’t about the profit, it was about the skillset

I finally found a partner and using our combined networks, we were able to muster $200k, which allowed us to buy a triplex

I’m going to assume you can raise a similar amount, but if not, no problem. Whatever amount you can raise, you back into a deal of that size. If you truly can’t raise any money (this is probably a severe character flaw if no one you’ve met in 20+ years of life would be willing to give you any money – but that’s a separate point), start up a real estate social media account, share your thoughts/analysis, create a network and raise the money that way

Step 2: Finding the deal

- The market: You’re going to go into a market where deals sell for less than $150k/unit. Additionally, deals in the market should be selling for 6% cap rates at minimum otherwise you’re going to find it too difficult

- You’re going to search on Zillow/Redfin for duplexes, triplexes and quads (loopnet and crexi only really work for bigger properties)

- Open up excel. Make a list of every property listed in the market. Track the price per unit it’s listed for and note the price per unit it sells for. There should be 50+ properties on this list or you’re doing it wrong. Download any and all financial information that’s included in the listing. If there’s no information in the listing, call up the broker and get it from him. By the end of this process, you should know exactly what price per unit properties sell for in the market and exactly what cap rate they trade at. You’ll be looking to buy a property below the market price per unit and above the market cap rate (stabilized yield). Simple

- Market rents: Same thing. First use the mls/costar if you have access to it. If not, get comps from brokers (still have to vet them yourself). Worst case scenario, use Zillow/apartments.com for active comps. Put them all in excel, discard any outliers and take the average. You’ll still need to run the “market rent” for each new deal you look at as each property differs slightly, but this should get you close initially

- Expenses: Use the P&L information you now have. Line each individual P&L up next to each other in excel & for each individual line item, note the cost per unit, cost per square foot & the overall expense load as a percent of revenue. Now you’ve figured out both revenue & expenses. You now should be able to create a brand new P&L for new properties you look at from scratch

- Brokers: Every time you see a broker on a listing, you’re going to call him up, ask him a few questions about the deal, tell him your criteria & ask him to add you to his mailing list. You should start receiving “passive” deal flow to your inbox every morning. Should also set Zillow/redfin alerts for your criteria. You’ll probably have to look at over 100 deals before pulling the trigger

- Underwriting. You’re going to underwrite 3-5 deals a week minimum. You’re going to underwrite them based on their stabilized yield (if you don’t know what this is, search my tweets for it). You’re looking for a 200 bps+ spread between your stabilized yield & the market cap rate. The higher the stabilized yield, the better. The goal is to understand exactly what price per unit & stabilized yield you’d buy a property in this market for so you’re ready to pull the trigger when the time comes

Step 3: Pulling the trigger

Your “buy box” should already be established, only thing left to do is find a deal that fits it. You should be tracking the aggregation sites daily, have plenty of broker contacts at this point & have a lot of deal flow hitting your inbox

When you see a deal that fits your criteria, pull the trigger

Since this is your 1st deal, you may have a hard time getting a loan. Instead of whining about this (like most people do), you can:
1. Do the deal all cash
2. Use seller financing
3. Get a guarantor to hop on the loan

Doesn’t matter which one you use, just get the deal done. As quickly as possible

Deal 1 Summary: Depending on your access to capital, your first deal should be 1-5 units in the $200k to $500k range. The timeline should be quick (doesn’t take long to renovate 5 units or less) & the profit doesn’t matter as much so I’m not even going to bother listing it (obviously if you do raise money though, be honest about the return profile up front). The idea is to “get you in the game”

Odds are extremely high you’re not thinking about risk correctly

An easy example of this is the employee/entrepreneur paradigm

// Thread // Most people fundamentally don’t understand the risk/reward profiles of the two choices, which leads them to make catastrophic decisions during their decision-making process

Employees are, by definition, underpaid for the profit they bring in (paid less than they’re “worth”)

Entrepreneurs, on the other hand, get paid a multiple on the profit they bring in

Let’s take two scenarios - one as an employee at a RE firm, one as a RE entrepreneur

In your career, every decision needs to be made with an end goal in mind

If you don’t have an end goal, you’re wasting time and energy. This is what most people do

They float around aimlessly until they’re forced to make a decision. You want to do the opposite

// THREAD // Your first step is figuring out your end goal. And that means answering the question “where do I want to be in 10 years?”

This isn’t a decision you should take lightly but it’s one you need to make

It’s legitimately impossible to make effective career decisions without first knowing where you want to end up

I get asked for career advice all the time - “should I take xyz job or zyx job?”

And the first thing I ask is always “what’s your end goal?”

After college I joined a $500MM+ AUM real estate private equity firm. Within just 2 years, I became a junior partner

I won't deny luck played a part, but I'd like to think there was some skill involved as well

Most important part by far was office politics

Here's how I did it: First thing you want to do when you join a company is fully understand the scope of their operations

Many people silo themselves into 1 role & then put their head down. This isn't smart

Need to understand everything

So what was the "big picture" of the firm?

Probably the most common question I get from younger guys is “How would you do it all again if you were my age?”

I’ll do you one better. Here’s an extremely realistic gameplan to get from ~$0 to $1MM in 5 yrs

I’m going to assume that you have a W2, are roughly 22 and have limited capital coming out of college

We’re going to get you from $0 to $1MM in just 3 deals // Deal 1 //

You’re broke and have no skills. Everyone was here at some point. You can either whine about it or you can get moving

Reason most people think making money is hard is that they focus on how hard the end goal is (making $1MM) instead of focusing on the first step of the process – gaining the knowledge necessary to start making money

This first deal doesn’t matter at all. The only reason it matters is to “get you in the game”. Once you buy a deal you start accruing market knowledge, you start accruing relationships (lender, investor, broker, etc) – you start to become “dangerous”

You obviously want it to be a good deal but it doesn’t need to be a *great* deal. Because the purpose isn’t to make money, it’s to gain knowledge/skills/relationships so you can make real money on future deals

So what does this mean in a practical sense?

Step 1: Figure out how much equity you either have yourself or can raise

I was literally dead broke for my first deal so was only able to put $2,500 of my own money in. I reached out to my entire network and was only able to gather ~$100k. That wasn’t enough to buy a triplex all cash in my market (which is what I was targeting)

So I reached out to friends who could possibly partner up in the deal. Meant splitting the GP profits but didn’t matter to me. Was going to do whatever it took. If I needed to take on 10 more partners, I would have. It wasn’t about the profit, it was about the skillset

I finaly found a partner and using our combined networks, we were able to muster $200k, which allowed us to buy a triplex

I’m going to assume you can raise a similar amount, but if not, no problem. Whatever amount you can raise, you back into a deal of that size. If you truly can’t raise any money (this is probably a severe character flaw if no one you’ve met in 20+ years of life would be willing to give you any money – but that’s a separate point), start up a real estate social media account, share your thoughts/analysis, create a network and raise the money that way

Step 2: Finding the deal

- The market: You’re going to go into a market where deals sell for less than $150k/unit. Additionally, deals in the market should be selling for 6% cap rates at minimum otherwise you’re going to find it too difficult
- You’re going to search on Zillow/Redfin for duplexes, triplexes and quads (loopnet and crexi only really work for bigger properties)
- Open up excel. Make a list of every property listed in the market. Track the price per unit it’s listed for and note the price per unit it sells for. There should be 50+ properties on this list or you’re doing it wrong. Download any and all financial information that’s included in the listing. If there’s no information in the listing, call up the broker and get it from him. By the end of this process, you should know exactly what price per unit properties sell for in the market and exactly what cap rate they trade at. You’ll be looking to buy a property below the market price per unit and above the market cap rate (stabilized yield). Simple
- Market rents: Same thing. First use the mls/costar if you have access to it. If not, get comps from brokers (still have to vet them yourself). Worst case scenario, use Zillow/apartments.com for active comps. Put them all in excel, discard any outliers and take the average. You’ll still need to run the “market rent” for each new deal you look at as each property differs slightly, but this should get you close initially
- Expenses: Use the P&L information you now have. Line each individual P&L up next to each other in excel & for each individual line item, note the cost per unit, cost per square foot & the overall expense load as a percent of revenue. Now you’ve figured out both revenue & expenses. You now should be able to create a brand new P&L for new properties you look at from scratch
- Brokers: Every time you see a broker on a listing, you’re going to call him up, ask him a few questions about the deal, tell him your criteria & ask him to add you to his mailing list. You should start receiving “passive” deal flow to your inbox every morning. Should also set Zillow/redfin alerts for your criteria. You’ll probably have to look at over 100 deals before pulling the trigger
- Underwriting. You’re going to underwrite 3-5 deals a week minimum. You’re going to underwrite them based on their stabilized yield (if you don’t know what this is, search my tweets for it). You’re looking for a 200 bps+ spread between your stabilized yield & the market cap rate. The higher the stabilized yield, the better. The goal is to understand exactly what price per unit & stabilized yield you’d buy a property in this market for so you’re ready to pull the trigger when the time comes

Step 3: Pulling the trigger

Your “buy box” should already be established, only thing left to do is find a deal that fits it. You should be tracking the aggregation sites daily, have plenty of broker contacts at this point & have a lot of deal flow hitting your inbox

When you see a deal that fits your criteria, pull the trigger
Since this is your 1st deal, you may have a hard time getting a loan. Instead of whining about this (like most people do), you can
1. Do the deal all cash
2. Use seller financing
3. Get a guarantor to hop on the loan

Doesn’t matter which one you use, just get the deal done. As quickly as possible

Deal 1 Summary: Depending on your access to capital, your first deal should be 1-5 units in the $200k to $500k range. The timeline should be quick (doesn’t take long to renovate 5 units or less) & the profit doesn’t really matter so I’m not even going to bother listing it. The idea is to “get you in the game”

It’s always good to look at past deals to see if you passed on any deals that you should’ve bought

This is an example of a deal that I passed on in 2021, but in hindsight, probably should’ve bought

Why? Because I underestimated the upside case

The deal was a 16-unit multifamily property that was being offered for $1.5MM. The deal was interesting for a few reasons:

1.     It was good real estate. It was located in a great neighborhood with a great school district in the middle of a cluster of single-family homes (barely any other apartment complexes in the area). The units were 2 stories with a basement/ backyard which gave it more of a "home" feel than an "apartment" feel - felt like you could raise kids there
2.     The deal was hairy. It was in a tenant-in-common structure. Basically there were 7 buildings that comprised 4 units each and I’d be buying 4 of those buildings (for a total of 16 units). This tenant-in-common structure scared a lot of buyers, which meant opportunity

I generally try to structure deals with very low downside risk, high upside kickers and multiple exit strategies – I know this sounds obvious, but very few investors actually structure deals like this.

// The Low Downside Risk //

First off, it’s great real estate stabilizing to a conservatively underwritten ~9% stabilized yield. But why is the downside risk low - what makes it "conservatively underwritten"?

1. It included $20k/unit for renovations reserved up front
2. Stabilizing ~200 bps above the market cap rate is generally pretty safe
3. The stabilized DSCR was very high at 3.6x. For reference, banks usually lend down to ~1.2x DSCR
4. Low leverage. The deal was only 50% levered off the purchase price and the renovations were funded through equity

One thing I'd note though is that fractured condo/TIC deals typically have fewer buyers. So there's less potential liquidity on an exit. The downside is just cash flowing at a high DSCR so it's relatively capped but it's worth noting

// The Upside //

There are 2 upside cases in this deal:
1. Since the property consisted of buildings that comprised 4 units, they could be spun off/condo’d out to an owner-user for a higher price than they would have yielded as cash flowing multifamily (~$175k/unit to an owner user vs the base case ~$145k/unit to a multifamily operator after resizing the rents to market). Anytime you see a property with the ability to break it down to sellable pieces of 4 units or less (4 units is the max allowable units that the government allows to receive higher leverage gov financing – FHA loans, etc), that represents a significant opportunity to sell off to an owner-user for an increased price
2. There was a possibility of buying out the remaining 3 units, dissolving the TIC structure & converting to regular multifamily. It’s all speculation (anytime you’re betting on a cap rate at a point in time in the future, you’re speculating) but generally you can get ~100 bps lower (better) debt on multifamily vs multifamily units that are encumbered with a tenant-in-common type structure, which means a lower exit cap rate

// Exit Strategies //

In a normal deal, there's only one exit strategy, this deal has 3:
1. Exit as a 4-building (16 unit) portfolio fractured tenant-in-common deal
2. Buy up the other 3 buildings, exit as a 7-building (28 unit) multifamily deal
3. Spin off each building individually to an owner-user or as condos

Buying good real estate, investing in slightly more "complex" deals & structuring deals like this makes the deal way more versatile

Low downside risk, 2 upside cases and 3 exit strategies - gives you a lot of levers to pull if things end up going wrong. In most deals, if things go wrong, your only option is to sell as-is and take the loss

Now let’s discuss the tenant-in-common structure… // The Tenant-In-Common Structure //

The tenant-in-common structure was interesting and made this deal very attractive to me. For those of you who are unaware, a tenant-in-common structure is basically an agreement that divides a parcel of land into ownership between more than one person

Any time the ownership of a deal isn't absolute (“fee simple”) or there's any bit of hair on the legal side, that scares away a lot of buyers. A lot of buyers just skip over the deal because they're too lazy to read the tenant-in-common docs. In this case, most of the ~10 initial bidders weren't willing to bid at ask because they read the tenant-in-common docs, didn't understand them & thought there was risk in them (not even kidding - the bar is that low - if you have basic reading comprehension skills you have a significant advantage)

Here's the gist of the docs:
- Each individual owner of the 7 buildings (in reality, it was a developer) agreed in the 1980s, to contribute their buildings to an Association which was to be a TIC. These buildings were then leased back as individual ground leases for $1/year
- The ground leases had ~10 years left on them but automatically renewed after that unless there was a unanimous decision between all of the members to revert (so there was no way to get out of the tenant-in-common structure after 10 years just by virtue of time elapsing)
- The Association is composed of 7 members who all have an equal vote and is governed by a board of directors composed of 3 individuals. Any member of the board of directors could be removed without cause by a majority of the members (4+). As owners of 16 units, I’d own 4/7 of the buildings, a majority, and I’d be able to elect the entire board of directors and control the entire Association
- In effect, the only things the board of directors/the majority couldn’t do is to change the documents or dissolve the association (which is very important because it means you can't force the other owners to sell)

Essentially there was nothing "dangerous" about the docs given that I would own a majority of units and would control the entire Association

The "base-case" scenario, therefore, was actually pretty safe. The main negative was that the upside was less likely to occur because each upside scenario depended on owning all of the units and there was no way to force the current owners to sell

This is really the main reason why I wasn't willing to bid higher on the deal. There was no real "trump card"
The only way to take full control of the Association (and have the ability to dissolve it and turn it into multi) was to buy the units from the 3 other owners

So this meant a few things:
1. My conviction in the upside cases was significantly lower than it could've been. Since the base case was way more likely than the upside case, this meant I had to be way more comfortable with the base case
2. The deal could've ended up being a longer term hold than I wanted it to be if I had to wait for all of the owners to sell to me
3. The other owners had a lot of power over me. Needing them to sell to you obviously isn't an ideal position to be in. And they're 3 of them. Because even if I could convince 2 of them to sell, the last one can hold out on me and essentially extort me if he realizes how valuable his property is to me. There are obviously things you can do to make their life incredibly difficult (jack up the fees, pass laws to hinder their ability to conduct business) but that method really isn't ideal for a lot of different reasons
4. The last upside case was that the property could be sold off individually to owner-users. The issue with this is that I would only be buying 4/7 of the buildings. Since a majority of buildings controlled the Association, after selling off the first building individually I'd no longer have a majority and would be at the whim of the Association

Which means that…