How the Capital Stack Works in Private Real Estate

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. 

Resources

(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.