RES 217 | Structuring Real Estate Deals

The market is changing and the gameplay in structuring a real estate deal has evolved. Today, the lender controls almost every deal because they’re sensing the change in the market. Rahul Patel, the Managing Partner of Patel Gaines, the fifth fastest growing law firm in the nation where he represents over $8.5 billion in commercial property, breaks down the growing problems in structuring deals nowadays and reveals how market competition affects the way a deal is structured. In today’s time where the prevailing strategy is enticing the seller before understanding the requirements of the lender, discover from Rahul how to rise above this mistake and be prepared in making a successful deal going forward.

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Structuring Real Estate Deals with Rahul Patel

Our guest is Rahul Patel. Thanks for being on the show, Rahul.

Thanks for having me on.

I was pleased to hear him speak at an event a few months ago in Tampa. A little about him, he’s an attorney, a licensed NBA agent, real estate developer, professor, speaker and serial entrepreneur. He’s most commonly known as the Managing Partner of Patel Gaines, the fifth fastest growing law firm in the nation where he represents over $8.5 billion in commercial property. He’s been featured in USA Today, Forbes, Fortune, Businessweek, Texas Lawyer and The Business Journals, where he was named the Man of the Year, an outstanding lawyer and a 40 Under 40. Rahul, thanks for your time, sharing your expertise and experience with the audience. Give them a little bit more about who you are. Let’s dive into some of these important things that we need to know in the syndication business from an attorney’s standpoint.

I was in the real estate business before I went to law school. I got into the hospitality business, the hotel business. I did development there. The multifamily world and the hospitality world have a lot of similarities in essence. I got my keep there and I went to law school. One of the first big cases we got involved in was an owner who had about $700 million with a multifamily property that was tax credit deals. They were LIHTC, which is Low-Income Housing Tax Credit deals. They were complex deals. They got into a dispute over the tax worthiness of their projects. That’s how I got into it. We’ve been doing a lot of multifamily. We probably have about $5 billion to $6 billion in South Texas that we represent, property tax purposes transactionally and multifamily has been great. At least for the Texas market in general where we’re from, it has been hot. We got into the tax space. I have always been in the real estate space. Our firm helps from front to end lots of things that come up in the multifamily business.

I’d like for us to get into some things you’re seeing now in the industry, maybe some problems you see that are happening time and time again. Maybe some things we haven’t thought of whether it’s structuring our deals or what is involved in making a deal successful from your line of work. Something as simple as are we allowing enough time or is it structured correctly and some things that you are seeing now in the industry.

First, let’s talk about the unit. The market is still good. In general, for multifamily, the market is still strong. We are seeing lots of transactions and lots of activity. Lenders have not shied away from the ability to do deals within this space. Second, from a positive standpoint, people’s lifestyle, requirements and needs as a country and as a generation involved has also changed. We talk about Millennials. We talk about the young working person and the young working family. Their needs have also changed. You grew up with the dream of a house, big lawn and white picket fence. That’s the story of the American dream. That has also changed. People are working from home. People are working remotely. People are looking for less tie-down in their house and looking for their capital to be used in other ways. That bodes well for the multifamily space because you can allow for the creation of communities, epicenters of these things where people are saying, “I want to live in a house in a community and drive an hour to work.” From the good, there’s a lot of good.

Some of the problems, just like anything, there’s a period of very good growth in something. You have to be careful of the problems that are going to be either swept under the rug by industry, not by anyone individually but as an industry that you don’t see. Also, trends you’re not watching from a backwards-looking standpoint. You’re often looking forward which you’re also saying, “How many new suppliers come on? Class C properties when they’ve been upgraded, have they seen the ticks that they sold?” If you said, “We’re going to take a 1960s product. We’re going to dump $1 million into it and turn it into a class B-minus product. The revenue should go up,” has anyone spent the time to study some of those things? You’ll start to see some trends there.

When you talk about problems, I look at them as not problems, not as, “What do we do?” Those are more or less ways to improve or separate yourself from those that might be saying, “It’s too hot of a market. I don’t want to overpay.” You may not overpay. You may see some opportunities or someone overshot their opportunities. The problems I see is I think that the prices for many assets and what it’s taking to get a deal under contract is significantly changing. That’s creating problems for folks like our team who’s often challenged with making all come together.

You’ve got complex layers. This isn’t like buying a home where you find one, you put a down payment, and then you get someone to lend you money on it and you close. That’s a simple process. In this, there are many different pieces coming into play. We’ve got partners. We’ve got investors. We’ve got operating folks. We’ve got multiple pieces of financing. There’s private financing. We have a bank or Fannie Mae. You have deals that you struck with your investors that your lenders are saying, “It’s not going to work. This is how it’s going to work. This is the structure. This is what we demand. These are the reserves we want.”

Folks are running into problems because the market might be changing, so have the lenders. They haven’t run away but they’re also saying, “We might want to put a little more reserve.” They have been the first to learn where there can be some areas where they can be more protected. Where we’re seeing some problems in the deals are there’s a lot of competition. When there’s competition, there are two things. You either are the big fish that has the ability to get those deals or you’re overpromising and trying to figure out backwards how to get it done. I’m seeing a lot of that trend, “Get a deal under contract. We’ll figure this out later.” That doesn’t always work when you have complex items that you have to do. A 60-day close, your lender for crowdfunding type deals or anything that smells of crowdfunding, Fannie Mae, you’re not even going to get on the rear block in that timeframe. How in the world can you expect to close? Those are some of the problems.

A lot of times, folks that don't have several holes in their belt. They haven't expanded but shrunk. Click To Tweet

Talking about the competition in the market, how that changes things and how that affects the deals that you think you have. It makes those deals artificially more valuable. Is there value there? Maybe not, however, somebody else is willing to pay this much, so you’re willing to pay a little more. You get a little emotional. All of a sudden, you’re paying way too much for this deal that you think is the deal but it stems from the competition in the market.

That’s a big driving force are folks want to win a deal. We’re in a little bit of that era where folks have seen how much profits had been there. They’ve seen the cap rates. They’ve seen the trading. They’re like, “It doesn’t matter who wins the deal. We’ll maybe make less. Even though we’re shooting for this, we’ll make less but it’s okay because in twelve months, we’ll be out.” What if you’re not out in twelve months? Does that still make sense if option A goes away? The Fed could make a decision and it could go away overnight. The housing market could crash. You say, “That can’t happen.” All it’s going to take is as simple as a declaration of war and we’ve got housing market shift. Why would you see an apartment for $1,800 a month when you can buy a 3,000 square foot home for the same price?

The competition has separated a lot. It’s separated those that know the deal, know what it’s going to take for it to work up or down and those that are saying, “This will make it work in a perfect world.” We don’t live in a perfect world, so you have to balance a desire to be aggressive versus also make sure it’s a sound financial decision. This isn’t $50,000. This is millions of dollars with a lot of backend requirements. You buy a pair of pants that were overpriced, you paid for it. They’re yours. You buy an apartment complex and you put $2 million of equity into it. You owe another $8 million, which there’s a lot of responsibility there that comes with it.

Let’s move into some of the problems or structuring deals or maybe some things you see that people are making mistakes on.

The biggest problem that people are making deals on is they’re structuring deals without understanding what they’re lending to it. You understand the equity component. It’s easy. I need X percentage-wise if I have a $10 million project, for example. Let’s say we need to have $2 million of equity. That’s easy. You just know what you need. The problem is the $8 million that you need comes with, “Strings.” If I’m going to give you $8 million and you need it, they’re going to be on my terms. “I need you to set up a single purpose entity that’s out of Delaware. I need a string member. I need 6% of reserves versus 4%. I need XYZ,” and you have already made a set of promises to your $2 million. If your $2 million doesn’t win, the guy that’s bringing in the $8 million, the bank, they are winning that conversation.

RES 217 | Structuring Real Estate Deals

Structuring Real Estate Deals: We don’t live in a perfect world. You have to balance the desire to be aggressive versus the assurance that it’s a sound financial decision.

 

Not that it isn’t a problem or isn’t something that comes up in every walk of life. The issue is the deals we’re seeing because it’s such a competitive market, people are putting hundreds if not sometimes millions of dollars in earnest money hard and expecting to close quickly by making that the deal point. They’re enticing the seller by saying, “Don’t worry, we’re going to close in 60 days. I’ve got the $2 million in my bank account.” From the seller’s standpoint, it’s like, “What does it matter to me? I’ve got a contract. If you don’t close, I get $500,000 earnest money.” The problem is they have not understood when they can close. I would ask a client, “Have you closed a deal from beginning to end in 60 days without an extension? Do you have a team in place? Do you have a transaction manager? Do you have a due diligence manager? Who’s doing those things?” You’ll find out that a lot of times folks that don’t have several holes in their belt haven’t expanded and shrunk. They don’t know how to get fat. How do you get lean again? They put them on for the first time or the second time. It creates lots of stress, lots of anxiety and lots of calls. Ultimately, they’ll spend three to five times more in fees trying to get the deal closed.

I like the point there about enticing a seller, making promises to close quickly before you understand the requirements of the lender. It’s such a deal breaker. You’ve already put the money hard and it’s gone.

Because of the franticness of it, people are working backward. They are not taking a project, talking to a lender about it and say, “I’m about to put this deal on a contract. What are your thoughts? These are my guys. This is what my structure looks like. Can you give me some feedback?” They’re saying, “I’ll figure it out later.” It’s like, “Book the ticket, get to San Antonio and then we’ll figure out where we’re going to stay, where we’re going to eat. We’re going to do all that later.” A few years ago, it was easy. Nowadays, the climate has changed. The lenders have the upper side because they’re the ones giving the money out. They’re also the ones sensing some change in the market. They’re seeing because of so many competitions and many deals that they don’t have to lend on any deal. They can lend on the ones they want to as well.

They’re supplying 80% of the capital. I can understand. Everybody should understand why they can call the shots. There are some great points you made there about enticing the seller before we understand the requirements of the lender and the franticness in the space. When you’re trying to get a deal closed, we end up working backward and not thinking through that process. Now the lender controls the deal almost because they’re sensing the change in the market.

It comes down to how you do things. My philosophy of things is I would much prefer to tell you from the beginning, “I’m going to put this deal on a contract for 60 days, but I have a feeling it can take you 120 days. What are your thoughts about that? What’s that going to look like?” You’re going to say, “There’s a chance we’re going to close it in 120 days because in day 91, I’m in France. I’m not going to be back. I’m not closing this deal. I’m not going to France until this deal closes or I’ve got a loan that needs to be refinanced by November. I have plenty of time or I don’t. I’ve got to make a decision.”

Wherever you are, stop, take a breath, and reflect on what you've done. Click To Tweet

My personality is of the mindset that if I can work with someone that’s going to be transparent, that’s going to be our number one choice. If they will not, sometimes we don’t take those deals on our end because I’m under pressure of something that I know cannot get done. If there is a sniff of a crowdfunding deal on a Fannie deal, you’re not going to be done in 60 days. It doesn’t matter if you have a seasoned team. You’re probably not going to get done in 60 days. It’s not because you can’t get everything structured and ready to go. You’ve got to get someone in Fannie to sign off on it. That’s not going to happen in 60 days.

The reality of it is making sure that you’re transparent from the beginning. It will allow for a lot less headache down the road of timing, needs and what you need in order to get it done. People are fearful that they’re going to lose the deal by having that conversation. I have a good mindset that you’re going to lose it anyways because you’re better off doing that now than at day 58 going, “I need another couple of months.” You’re going to say, “No,” or you’re going to say, “Okay but I want another $500,000 hard release now.” How do I negotiate with you on day 58 when I’ve already spent $30,000, $100,000, seeing the deal with lawyers with documents? In all the countless hours, what do I do?

In the beginning, if the seller wasn’t going to give you an extension, then he wasn’t going to give you one in day 58. Why do that now? I’d much rather say, “Let’s buy an extension from the beginning.” Some of those things that I talk about that some folks don’t want to hear. They genuinely live in a world of perfection. You can achieve perfection. If you are one that has and you’ve got a team, you’ve got the right experience, it can be done easily. They set the target right from the beginning. We don’t have an LOI that’s presented to us that is not possible. We see that all the time. An executed LOI, we look at this and go, “How is this possible?” You can’t even structure a deal that way. The lender will never let you do that. They’re like, “This is what we sold our equity investors.” It’s like, “You can sell them what you want, but that’s not going to happen. You need to go back, call each one of them and explain to them that this deal is going to change, which is now bad on you.”

You have to go back and unpromise what you’ve already promised. How can we keep that from happening? How can we be as prepared as possible when we’re structuring the deals? What is involved in making this deal as successful as possible?

Number one, before you go and chase a deal, figured out who and how you possibly are going to take your money from. You’re not in equity. Where’s your debt from? That’s the number one component. This isn’t even rocket science compared to most things. If you know you have perfect credit, no debt, and a six-figure salary, you can go buy any home you want that’s within reason. You don’t have to worry too much. If there’s any segment where you might be operating in an A-minus or B-plus, the first thing that any home buyer should do regardless of where you are is to find out how much you got approved for. Go to the bank. Give them your financials. Give them your W-2s and everything you have. They’ll tell you what they’re going to pre-approve you for. Now, you set your target.

My number one statement would be who your Rolodex of people is? It’s not based on, “I got a business card from this guy. I got his card. When I need something, I’ll call him.” Have a conversation. What are their lending limits? How are their deals structured? How long does it take for them to fund and close a deal? What support are they going to provide on those things? Are you committed to me based on my financials and on my background check? Do you want to do some checks on me first and make sure that we’re good? You’ve got two or three of those business cards in your pocket. The seasoned buyers already have those.

If you’re new, you might want to make sure which party you want versus which party is going to have to be thrown away in the garbage because it’s not going to mean anything to you. You will chase 30 days, 45 days, chasing a lender that has no ability to close for you either. That’s a flip side to that. There are a lot of guys that are trying brokering, lend money deals. They’re brokering finance deals for you that have no ability to get you that deal done probably. They don’t even have real serious business. You’re also looking at it buyer-seller or there’s a party out here that are trying to bring you the money, which may or may not happen.

My first priority would tie that down. They’re going to say, “Without a deal, how will I know?” You will know some information that’s critical. You can set up loosely your structure. Your LOI should have some more form to it because you’re going to know what you need. You’re also going to know what your lender is going to ask for because they’ve told you. In your due diligence, you’re asking and seeking the right things then you go there. We are oftentimes working backwards. They say, “I can’t go back on my word because that’s what I signed on the LOI.” That’s not going to happen. Who has to be the bad guy now? Is it me? I’ve got to make the call and oftentimes, that’s what we have to do. I have to end up making the call.

By going through the process that way, you’re not wasting time. When the clock is ticking, that 60 days, 90 days is clicking, you’re not wasting time trying to figure out who your lender is going to be and wasting time with somebody who’s not willing to work with you anyway.

As a guy putting a deal together, have you had conversations with a possible investor that hasn’t worked out? Did you have a 100% close rate with that guy? Was the check $100,000? If your answer to that is yes, then go ahead. If your answer to that is no, it’s not 100% close rate, then your lender has the exact same answer to this. We will not fund any and every deal. You might go in and go, “No way. That’s not happening,” or, “It’s not happening on the terms.” You lock that up. That will give you strength in negotiation, not by strength of price and time is where people tend to be leading with negotiation.

History always tends to find its way forward. Click To Tweet

What I should say is, “These are the other guys that put in this offer for $18 million, $2 million above me. There’s not a chance that they close.” Have they closed? No. Have they done a deal before? Kind of but not really. I’ve got a commitment in hand for $16 million because they’ve underwritten the project and saying that’s all they’re going to give me. Therefore, even though mine might be lower and mine might take more time, I’m prepared to do this. You can spend 60 days with this guy and get nowhere and get $100,000 hard money, or you can go 95 days or 120 days with me but close your deal. Which one do you want? Your strategy is so much stronger. People leave with more money and quicker time all the time. I can sense that as a rookie. Anytime a new deal maker, I call the Instagrammer or the Facebooker, that you can spot in a heartbeat. If I can spot it, so can everybody else.

If somebody is realistic, that shows that you have some experience. It isn’t about allowing enough time. From our previous experience, we know this is going to take us at least 90 days. Is that something you’re open to?

It comes with credibility. Here are the reasons. “I’m not wasting 90 days of your time and you’re not wasting 90 days of my time because I want to buy the thing. I’ve done all of this due diligence only to buy it.” This guy is shooting for the moon. Chances are you’ll never land there. If you want to do that, go right ahead. If this deal will work based on these reasons that always tends to work better. Even if the deal doesn’t happen, it works better because you don’t want to spend that 60 days on a deal that never worked and now have to retract and scramble. Instead, you were focusing on a 90-day or 120. We’ve been using the time deal. That’s one example. Lots of things come up in a series of a transaction that you need to know and have the ability to understand what may come up.

After we get that deal closed or we’ve done a few deals, what else should we be thinking about to make sure we’re on track to being successful going forward?

The thing to be successful is you look at where you are. If you’re a multiple-deal person, regardless of where it is, your first deal is the hardest. The second deal becomes a little bit easier. Wherever you are, stop and give yourself a check whether you’re two deals in or twelve deals in or 50 deals. Regardless of where you are, you should take a moment. Every instance where you are, to check and evaluate it’s okay. These are the two I closed. Too often, people go to the third because the deal chasing is fun. It’s the most real part of it. You toast champagne and you close the deal, put one under contract, smoking cigar. That’s the best part of all of this stuff sometimes. Don’t forget why you bought that.

RES 217 | Structuring Real Estate Deals

Structuring Real Estate Deals: Hire the experts and lean on them, but understand that you will have those tough conversations for a reason.

 

Are you getting 20% returns? Did you get the rehab project done in time? Are you telling me the reserves that you need? Are your investors being paid on time? Do you have enough? Is this project getting all of the attention it needs? Is the management company right? Wherever you are, stop, take a breather and reflect on what you’ve done. Here are the two things. You might realize that you need to spend more time on what you’ve already done. Second, you might also realize that the deal that you thought was maybe the least profitable for you might end up being your best profitable. The one that you thought was the most might be the most problematic.

History tells us a lot. History always tends to find its way forward. It’s the same thing with your own history, it should help you find your way forward. If you have one deal in or two deals in or 30, you should stop and say, “What have I done? Where was my energy lost? How did I only close one deal last year when I closed four the year before? What did I do differently? Maybe I deal changed. Maybe I did this. Maybe I lost the transaction manager and I didn’t realize how important that piece was to me. Maybe I need to spend a couple of weeks or a month getting that piece back in place. I’m going to do what I do.” I feel like there’s a lot of that. We’ve got a lot of folks who are inexperienced or you got one person experienced coming in together with different people, but they haven’t worked in general together.

What’s the number one thing someone can do to improve their syndication business from your standpoint or experience?

Talk to people who have helped done this before and take their advice. I say this with an ultimate caveat. These are all entrepreneurs listening from another entrepreneur. You can say, “The hell with what you say. I’m going to do what I’m going to do.” What I always say, “In this business, we have no skin in the game to give you the wrong advice. My skin in the game is to give you the right advice.” Folks have done multiple deals with us because they don’t like what we always have to say. They don’t agree with it. They feel that they can overcome that. My challenge back to you is to listen to that advice because you’re paying for it. Otherwise, don’t pay for it. Do it yourself.

Learn from it because it’s there to help you. It’s not my $2 million on the risk. It’s yours. Why am I trying to walk you out of doing the deal? I don’t have any reason not to. I got all of the reasons for you to go do the deal. My theory is making sure you find people who know what they’re doing genuinely. People are challenging because there are a lot of yes people along the way that you already have. Brokers and lenders, they’re all, “Yes, this is a great deal. It’s perfect. Don’t worry about construction. It’s time and XYZ.” Find someone that you can trust and listen to them. You’re not going to like what they have to say but listen.

Time is where people tend to be leading with negotiation. Click To Tweet

We can’t be an expert in every particular point or part of this business. That’s why we hire experts like you.

There’s an important distinction to that. When people hire a lawyer, they don’t spend the time to understand why and what they’re advising you to do. There are changes to whatever the lender requires. You need to understand those. That’s why I say to take a moment. Regardless if this is my advice, you need to listen. Wherever you are, pause. Take a one-week pause and go back and look at what you’ve done. Are you doing all of those at 100%? If you’re not, you don’t need to worry about the next deal. You could raise your portfolio. From 90% to 100%, you’ve got millions of dollars of possibilities that you already have. Why are you focused on the next one? People hire the expert, but they don’t spend enough time to understand what they’re required to do and what they’re asking.

What’s the number one thing that’s contributed to your success?

We’re transparent and honest. I’m going to shoot it to you straight. I’ve had folks that fire us because they don’t like what they hear, what they have to hear, what’s being said or the realities of it. It’s those folks who’ve checked and evaluated how they’ve got help, how they’ve gotten good advice along the way, “Has it helped them grow?” It’s those folks who continue to come back to us. There are tough conversations that you have to have in order to progress. You have to hire the experts and lean on them, but you also have to understand that you have those tough conversations for a reason. I have no reason to get angry, tell you, “This is not going to work.” It doesn’t do me any benefit. You can hire another yes man. We’ve never been that, “Yes, sir. I’ll get it done.” Even though it is not the right thing for you, I’ll tell you my opinion, kicking and screaming. You’re almost going to be looking for another person in some instances. If you stop to reflect, “That was good advice.”

How do you give back?

My number one belief is in education. Without plugging in your own name, give people good advice or listen to them. I love education and educating folks. Most importantly, we’re involved in two big charities with Leukemia & Lymphoma Society in San Antonio, Texas. We’re a big part of their Man & Woman of the Year Campaign. We also have made a commitment on a local law school. I’m a part of a nonprofit angelfund to help bring new startup companies to San Antonio and accelerate them.

Rahul, you’ve been a great guest. You provided great content. You helped educate us in helping and make sure our deals are structured correctly. We understand that instead of thinking backward about it, make sure we have some of these things in place, especially with a lender beforehand, before we have that deal and it’s crunch time. Thank you so much. Tell the audience how they can learn more about you and get in touch with you.

You can go to www.PatelGaines.com. You can shoot me an email as well at Info@PatelGaines.com. My website is at RahulBPatel.com. Google me and search for us if you ever have any questions. If you’re looking for a deal in a state that we’re not in, we’re happy to point you in the right direction. Most importantly, make sure that you find somebody who is going to be your “partner” not just your lawyer when you go through these deals.

Thank you so much. I appreciate the audience being with us. I hope you will go to Life Bridge Capital and connect with me as well. I’d love to talk to you and help you in any way I can. Go to our Facebook group, The Real Estate Syndication Show, where we can all learn from experts, grow our business together and have them structured the best we can. We will talk to each of you soon.

Thanks for having me on.

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About Rahul Patel

RES 217 | Structuring Real Estate DealsAs Managing Partner of the Fifth Fastest Growing Law Firm in the nation, Rahul B. Patel has a flair for delivering simplicity and superior client service. Over the last decade, he has developed a reputation for his innovative approach to commercial real estate and property tax litigation where he currently represents over $8.5 billion in commercial property.

Not only does Rahul lead the Patel Gaines team, but he is also a certified NBPA Agent, a guest speaker for multiple organizations, and Professor of Hospitality Law at the University of Houston. Rahul was named on the San Antonio Business Journal’s 40 Under 40 and Outstanding Lawyers list, and was their Man of the Year. He has also been featured in USA Today, Forbes, Fortune, BusinessWeek, Texas Lawyer and more.

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