WS1513: How to Structure Debt and Equity  | Rob Beardsley

EPISODE 1513

[INTRODUCTION]

Rob Beardsley (RB): It’s a passionate topic of mine because the deal structure is nuanced. You can make it as simple or as complicated as you like. And it’s really one of the key factors to a good deal.

Whitney Sewell (WS): This is your daily real estate syndication show. I’m your host, Whitney Sewell. Well, as our business has grown, as we have done larger and larger deals, raising lots of money and just millions and millions of dollars from investors, but also getting debt of millions and millions of dollars, there’s so many different ways to structure those pieces of a deal. And there’s ways to do it correctly. There’s definitely ways to do it wrong. 

Our guest today, actually over the next few days has become an expert in this part of the business and many parts of the business. But he recently wrote a book just on structuring your deals straight. It’s called Structuring And Raising Debt And Equity for Real Estate. His name is Rob Beardsley. He oversees acquisitions and capital markets for Lone Star Capital, acquired over $350 million in multifamily real estate. He has about evaluated thousands of opportunities using proprietary underwriting models and published the number one book on multifamily underwriting the Definitive Guide to Underwriting Multifamily Acquisitions. 

So and again, he just recently published a new book called Structuring And Raising Debt And Equity for Real Estate, which you’ll hear us talk about in today’s show. And then over the next couple of days, we’re gonna go into much more depth about this specific topic. I appreciate Rob’s willingness to share and just what he’s learned. He has just dove in headfirst into this part of the business and underwriting, and the debt and equity restructuring, and definitely shares a lot with us over the next few days that I wish I had known to think about years ago. 

But even now, it’s great to hear some of this and just have a conversation about what’s happening. Even today’s economic climate, like how are you structuring these pieces, what has changed, we go into that as well. I know you’re gonna learn a lot from Rob today and over the next few days. I hope also that you have liked and subscribe to the show. I hope you’ll share it with your friends who are also in this business or investors who want to know more about the syndication business as we all got to push forward. 

[INTERVIEW]

WS: Rob, welcome back to the show. I’m honored to have you on. You become an expert in this field. And and you’ve written another book on it, I’m also looking forward to diving into that. And what I love too, about both of your books is that it’s like shortened to the point. It’s like, tell me what I need to know. And, tell me the helpful things that I need to know and kind of have under my belt before I start to raise money or start to structure data or start to think about what that should look like. And so welcome back.

RB: Yeah, great to be here. I’m excited about this conversation.

WS: Yeah, me as well. Give us a little bit about the book, and maybe what prompted this book and give the listeners a little bit about what they’re gonna get learn from the book as well. Because I know it’s kind of important. I wish I had I had books like that five years ago, right? And trying to figure out some of this stuff. Give them a little insight.

RB: Yeah, well, your point is exactly right. You and I both wish we had straight to the point books like this when we were first learning these aspects of the business, which the first book for those that aren’t familiar was about multifamily underwriting, which is a really critical process in the business. And then this newest book here is structuring and raising debt and equity for real estate. And this is a meaty topic, but somehow I was able to still condense it in just over 100 pages. 

WS: That’s impressive, by the way. 

RB: Thank you very much. Yeah, it’s a passionate topic of mine because deal structure is nuanced, you can make it as simple or as complicated as you like. And it really one of the key factors to a good deal. The way I see it is a good deal is the right price, the right structure, and the right execution. So it’s one of the one of the three pillars. And honestly, the reason why I wrote it was just simply to follow up on the first book. 

I felt like that the first book was something that I really wanted to do, because it was a gap in the market. There was no book out there that was just a straightforward guide on underwriting. So that turned out to be a really big success. And it resonated in that niche market. Obviously, not everyone’s running to read a technical boring book about underwriting. But for those that liked it, they really liked it. 

And so, I really wanted to follow up with another really impactful book. So that was the real impetus to write it. And I felt it was a natural progression to add this deal structure topic on top of underwriting because they are connected. But it’s also the second step right after you underwrite a deal, you really need to have the proper deal structure and ability to actually raise the capital on the debt and the equity side to close.

WS: Speak to how much experience do I need to be able to understand the book? 

RB: So that is, I’d say the biggest complaint, if there’s any about the two books I’ve written thus far is that it is not necessarily for a beginner. And I feel like at the end of the day, it’s still very accessible to a beginner, but it’s just you’re going to be having to look up certain definitions and concepts because I, unfortunately, don’t take the time to explain everything. So, I’m writing it kind of assuming that the reader is already in the space and involved and has some familiarity with the concepts which that’s just my writing style. And for me, that’s just what I’m passionate about. 

I like to talk at that level. So sometimes I forget or it’s harder for me to go and explain the simpler concepts. So yeah, that is just buyer beware on that front. But still, I think if someone’s willing to take the time and invest in a book like this or topic like this in general, then there should be more than willing to invest in some Google searches.

WS: No doubt about it. I completely agree. I just think, “Hey, if you’re gonna go syndicate a deal, you should be willing to read this book, right?” Even if you feel like it’s over your head at first, when you get into that deal. I hope that it’s not over your head by that point, right? And no doubt. And even then when you start to hear these terms, again, and again, and again, you’re going to be better prepared to understand what they mean. And where can they pick it up there, by the way, is that on Amazon? I couldn’t remember you sent me one, by the way. Thank you very much.

RB: Yes, you’re very welcome. So both books are available on Amazon. And then we also built our own website to sell the book, if you want to get it at a slight discount directly from us. And you can do that at structuringandraising.com.

WS: Awesome. I just said the listeners are Rob and I are going to do a series right now over the next day or so. So we’re going to dive into a couple topics around structuring deals and let him explain some of those things in detail. But Rob, why don’t you give us maybe an example of just deal structuring, like, why is this important, kind of high level and then over the next topic or so we’ll dive in a little more

But at least to be again, the listeners with, why structuring the deal correctly, or the best possible scenario? You know, why is that important? I mean, obviously, I know this, but I want the listeners to know from you like, are they not mostly the same? And we will all hear, you know, very similar structures often, but what all does that include when we’re talking about the structure of the deal?

RB: Yeah, so primarily, we’re talking about debt and equity. And so focusing on debt first, debt is one of the most important parts of your deal, because in my opinion, it’s the largest source of risk. So you could buy property at a great price. And you can have a great business plan. 

But if you finance it incorrectly, you might be setting yourself up for a downside scenario that you are not willing to accept. And so you need to understand the implications of the debt that you’re using. And the risk factors of debt, which we’ll get into more in later series, are the interest rate, the leverage and maturity or the length of the debt. And, you know, those are fairly simple points. But they all have a role in determining how much risk you’re taking with your debt. And you know, more debt or less debt is not necessarily always the right answer. And again, it depends on the deal, it depends on the investment goals. And that’s why it takes a little bit of nuance and understanding to figure out, “Okay, this is the right amount of leverage, because this is the sweet spot where we can still get better returns, you know, enhance returns to the debt.” But yet, we’re not putting ourselves into a certain risk territory that we’re not comfortable with. 

So that is, you know, the first thing, there’s a lot of variation on debt, as far as fixed rate versus floating rate, short term debt versus long term debt, recourse versus non recourse and other bells and whistles that you’re going to want to be aware of, as you go into your deal. And this is true, whether you’re on the passive side or the active side, you know, certainly you’d hope that you’d have a good understanding of this as an active investor, but as a passive investor, you want to be familiar, at least with these concepts. So that way, when you’re presented with a deal, opportunity, you know, what you’re getting into, you don’t want to be surprised.

WS: Yeah, one thing I meant to ask you as well is, especially with select the series of books, should we read the first one first, is that important that before we read the structure, you know, about structuring, should we read about underwriting first?

RB: That’s a good question. Actually, nobody’s asked that yet. It’s not mandatory. I don’t think it’s necessary. I’ll say it was written with that kind of idea in mind, right? First step is underwriting the next step is putting the deal together, but they are completely separate topics. So, yeah, they can be totally read on their own.

WS: Complimentary as well, though.

RB: Definitely.

WS: Yeah, helpful to understand both, no doubt about it. What about any actionable just advice that comes from the book or the listener can expect, you know, as they read, or maybe, you know, as they’re looking at a project now, is it too late to read the book if we’ve already got a deal under contract?

RB: Interesting. Well, if you already have a deal under contract, you know, it may make sense just to brush up on those different debt concepts that we just covered and debt options just to sanity check your deal and see, okay, are we using the right debt? With the right terms? Have we negotiated the right deal? Or are we leaving money on the table by not pushing certain buttons on the lenders term sheet to get ourselves the best deal, and it can be non economic.

You know, there are certain things that you want to be aware of that you want to negotiate for, such as, I mean, getting really into the weeds, you know, we’re talking about lockbox accounts in the book, and I talked about how a lender will sometimes require you to funnel your rents into a separate account that you don’t control. And obviously, you don’t want that it’s costly, and it is burdensome on your asset management team. 

So to the extent that you can recognize that ahead of time and negotiate that early upfront, you can possibly get that removed from the terms of the deal. So you know, yeah, I think if you’re under contract, there’s some still some things You get out of the book to make sure that the deal is good. And on the equity side, it’s never too late to just double check to see if your deal structure is in line with the market. You know, every buddy’s syndication structure equity structure may differ a little bit, but in my opinion, you don’t want to defer too much away from the market, because standing out can just be negative. 

You know, if even if you’re too cheap, it can still be perceived as a negative because people think, Oh, well, this person is offering their deal at a really cheap deal structure, cheap fees or cheap waterfall, something must be wrong here. So making sure that your deal structure is in line with the market I think is important as well.

WS: What about, you know, would it be helpful for people in other asset classes outside of multifamily?

RB: Yes. Okay. Love this topic, because the first book was very niche. And it was, you know, the definitive guide to underwriting multifamily is very specific to the to our industry. I made sure in the way I wrote it, not to get ahead of myself or carried away and talk to specific about multifamily. So my experience lies in multifamily. However, I wrote this new book about structuring and raising debt and equity, you know, on the cover of the book for real estate, so it’s not about just multifamily. So I wanted to have a broader appeal with this book and I think I did accomplish that.

WS: Awesome. What about speak to your knowledge base, or how you gained the knowledge to structure deals? Or, you know, I know how you got there to some degree. But explain, you know, how did that happen? How did you gain this level of understanding? I would say quickly, and to a very high level, I think you’re great at this. So how did that happen?

RB: Yeah. So just like the first book, you know, getting the experience for underwriting was just through practice and trial by error. So we, you know, I had built my own underwriting spreadsheet about six years ago, and had iterated it and spent hundreds of hours building and retooling it. As I’ve underwritten over 2,000 deals through that spreadsheet. And so that’s through that process of underwriting that many deals and getting feedback from lenders, potential investors, brokers, and partners all across the industry, that really helps us sharpen up our skill set. 

And then the same is true for structuring deals by doing a lot of deals. You know, in the last about a little over four years, we’ve done 350 million in acquisitions, we’ve done many partnerships in those acquisitions. So we’ve had the good fortune of partnering with sophisticated private equity firms and family offices across the country. And that I’d say is probably the best way that I’ve learned deal structure. Because when you partner with sophisticated groups, they introduce you to new concepts, new ways of thinking. And so I’ve had aha moments working with, you know, savvy partners going, Oh, wow, okay, that’s really neat. That’s cool. And so we’ve borrowed concepts, you know, whether it be a legal concept or you know, an economic concept or something like that, to really bolster our understanding of the topic.

WS: That’s awesome. We know, it’s so important who we surround ourselves with. And I think you could really niche down even on that. It’s like guys who are really good at structuring or underwriting deals, right? Should you be good at that you need to be around those people. Is there any way you’ve done that, you know, is like get around? I don’t know, if there’s masterminds that are just focused on on that. But anyway, that you’ve like been hyper focused on this topic.

RB: Yeah, I think one thing I forgot to mention from the previous question was a desire. And so I’ve always had a desire to understand these concepts at a deep level. And, having that desire and that intellectual curiosity has led me down the path of, you know, reading boring papers by lawyers, because deal structure gets down to very, you know, to the legal ease. And so you need to understand the nuances. And same goes for IRR calculations, and how x IRR and Excel is calculated and what the nuances there and what the downfalls are things like that. 

So I’ve papers and articles from attorney saved, that I’ve read multiple times, you know, so that desire and intellectual curiosity has led to that better understanding. And then now, as far as relationships, I think it also comes down to desire, you know, do you desire to have those relationships and have those conversations with those types of people. And so that’s certainly been the case for myself and our team. 

And so we have continued to seek out relationships with institutional investors or larger funds and family offices when I know that a lot of people in our industry kind of shy away from those sorts of groups because they feel like they are too expensive, or they take too much control in the deal and things like that. So they actually want to avoid those types of big savvy investors. But that hasn’t been us we’ve welcomed it and gone in the other direction. So in the book I also talk about on the equity side, and specifically on the raising equity side, I talk about institutional investors and how to build those relationships and what that looks like.

WS: Awesome. Well, I would tell the listeners as well look back, Rob and I’ve done a number of shows together actually show 186 and 849. So all the way back to April of ’19. We talked about the fundamentals of underwriting and Rob vibrated there in a big way. But then also in February of ’21, we talked about closing more deals with preferred equity so if you want to get know Rob, his backstory even more, I know we probably covered it on both of those shows, just to get to know him better. I would encourage you to do that.

But over the next over this series Want to we want to dive in specifically on structuring, you know raising debt equity for real estate and around this book and because I know it’s gonna help the listeners and I a lot.

So, Rob wants to tell the listeners how they can get in touch with you, again find the book and I want to dive in on the next segment a little more into the deal structuring.

RB: You could check out the new book at structuringandraising.com and if you want to learn more about myself and what we do at Lonestar capital, you can go to our website lscre.com.

[END OF INTERVIEW]

[OUTRO]

Whitney Sewell: Thank you for being with us again today, I hope that you have learned a lot from the show. Don’t forget to like and subscribe. I hope you’re telling your friends about The Real Estate Syndication Show and how they can also build wealth in real estate. You can also go to LifeBridgeCapital.com and start investing today.

[END]