How the Capital Stack Works in Private Real Estate

Patrick Antrim, CEO of Multifamily Leadership, discusses capital stack with Tanner Bickelhaupt, CEO and Founder of the Tanbic Company.

Deal Complications

(0:40) – The simple question of who owns the deal can prove to be complex.

Bickelhaupt chimed in with his own experience. “We picked a buyer and I was sent the deal for equity from another person that was syndicating into the syndication of the deal. If you think about that circle. So I’m thinking like, ‘Who’s that equity and how many times are they getting promoted?’”

Bickelhaupt explains, typically an investor in an LP pays a fee. If you’re paying to more people than you anticipated, that fee multiplies. Understanding the organization of the LLC will help you understand risk. 

“The business plan will show you the return parameters, but it doesn’t show you the risk is getting greater as you go or as it changes.”

(3:25) – Sometimes people figure the value doesn’t matter if they aren’t a seller. That’s only fine if you’re hitting your loan covenants. If the value changes on your deal, the lender can start getting upset about shifts.

“Most deal syndications have a PPM for your protection. It protects the investors as much as it protects the sponsor,” said Bickelhaupt. 

Bickelhaupt brings up that the people he works with have huge capital. It’s important to understand how much money they’re spending relative to their income. Is it play money that they can move around and not stress about? If it’s a chunk of their actual base money, then it can make things tense. 

Also keep in mind what everyone’s goals are. What are you trying to do, when do you need a return? 

(7:15) – Right now, there’s a property the Tanbic Company is looking at where the owners had it for 12 years and haven’t touched it. The location is great, but amenities need to be revamped. Plus, the demographic around him is affluent. The value would increase quickly; it would take about a year to revamp everything and bring in a new tenant base. If they’re successful, they would go in, get the rents up, enter a Fannie and Freddie type deal rather than sitting on debt. 


(9:50) – Bickelhaupt deeply believes your relationships with others are crucial. He builds his team as big as possible, figuring that every person involved in a resource. That way, if he sees a deal he likes, he can send in people who are experts in all different aspects of the deal.

Bickelhaupt says building his team was the very first thing he did when he started.

“In this stage, you can put together a really big team that’s not on your payroll until you do a deal. That’s an advantage. We outsource a lot. And it keeps it competitive and for all the stuff you’re doing with innovation, a lot of those companies are what I would call ‘partners’ of ours. We rely heavily on them. Now, we have an internal team that knows what to do with that data and knows what to do with that stuff, but there’s so much stuff in the multifamily space now that can allow you access to all of it.”

(13:10) – Right now, the big players are getting involved with debt funds. There’s been so much depreciation, they’re capitalizing to keep their leverage up. Those have different risk parameters.  

“Me? I’m just boring,” said Bickelhaupt. “I just like to buy a deal and fix the debt, have lower leverage, have lower reserves, grow it. If we’re successful, that’s fantastic. But we want the certainty of the cash flow as much as possible.”

Bickelhaupt says he’s never structured preferred equity into his deals. The investors he works with he builds personal relationships with, so he wants to be as aligned as possible.

(15:00) – There’s a great value if a new buyer can come in and put debt on.

“Where I self-admittedly have capped myself is one of the deals we were trying to sell, we fixed the debt on there long-term. We didn’t know we’d hit six-year numbers in Year 1. But the problem is, someone would have to assume that debt, so that would lower their leverage. Because my pre-payment penalty to pay off that loan is too expensive. But if they could put new debt on there, they’d probably put an extra – whatever the number is, it’s definitely worth more if they can come in and put today’s debt on there, because today’s debt is lower than a year ago. If that flips, the counter can happen. Now you have a below-market loan and maybe you’ll get paid for that a little bit.”

(16:32) – One of the things Bickelhaupt finds most exciting about the multifamily industry is that he knows he can better people’s lives. If he creates a property that houses 400 people, there’s a huge responsibility to make sure all those people are taken care of. 

“We aren’t interested in quick fixes, because we think we’re going to own it forever. And the stuff that we’ve sold, we’re hopeful that the people who’ve bought it feel they’ve bought an amazing project because everything that was fixed, everything that was done, was with the intent that we would own it forever.”

(19:00) – When looking at new deals, you have to factor in how happy the residents are in the property.

“It’s hard work. It’s supposed to be difficult. There’s not an easy way. You could come in and say whatever you’re going to do with that property. The resident only cares about one thing: ‘What are you going to do with my rent?’ Because you haven’t earned the trust, you haven’t earned anything,” said Bickelhaupt.

(21:00) – Bickelhaupt explains you can’t always expect things to go smoothly.

He’d just invested in a property and the day they were supposed to open, things shut down for the pandemic. “And I’m like, ‘Oh, this is how developers go broke. This is the part you can’t underwrite. Here we go!’ Everyone’s buying ozone machines, everybody was just trying to figure everything out. So we changed our capital deal where we had certain fees and things that were going to happen. Because we went back to all the partners like, ‘Hey, we’re all in. Nobody’s touching at thing here financially. We wrote to the lender: this is where we’re at, this is how we’re going to combat it. It all came together, but that just came from having partners that were all fully committed.” 

(22:35) – With new development, if you’re experienced and you have a track record, you can get lower recourse. 

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