The Essentials Of Structuring Deals with Ivan Barratt

The Essentials Of Structuring Deals with Ivan Barratt

Announcer: Welcome to The Real Estate syndication show. Whether you are a seasoned investor or building a new real estate business, this is the show for you. Whitney Sewell talks to top experts in the business. Our goal is to help you master real estate syndication. And now your host, Whitney Sewell,

Whitney: This is your daily real estate syndication Show. I’m your host, Whitney Sewell. Today our guest is Ivan Burt. Thanks for being on the show again, Ivan.

Ivan: Man, it is so fun to be back here. Whitney, thank you again for having me back. Really enjoyed last time and looking forward to more conversations with you, man.

Whitney: Yeah, I’m always honored to have you on the show just somebody your level of experience and, and expertise. We’re honored to have you here and learn from beer. So you know, our listeners probably heard you on show Debbie? Yes, 166. That’s been a little while back. And I would encourage you all to go back and listen to that and learn a little more about him. 

But he’s a multifamily unit owner and syndicator, who specializes in FHA and agency finance projects he’s raised, has raised since 2015, nearly $60 million in equity, acquired over 2500 units, and grown Barrett asset management to be best in class vertically integrated asset and property management firm, his company’s manage well over $200 million in assets comprising nearly 3500 units. And thanks again, you know, give the listener a little bit more about just what your focus is right now. And then we’ll jump right down to the big topic of structuring deals.

Ivan: Sure, sure. Well, again, it’s my pleasure to be here and biography updates, by the end of next week, we’ll be at about 65 million in equity raised that that next five is the first five in our new fund. So now with a track record and some trust, we’re moving forward to a multi-asset structure to help us raise more capital go after bigger game, so to speak, and also provide another level of diversification to our investors, I get to spend most of my time on the equity side of the capital stack these days, which means, you know, a fancy term for raising capital. And then I get to spend a lot of the time above that really focused on the big, big strategy, the high-level vision of our company, which is a fully integrated private equity and management firm, all the way down to the leasing agent and the maintenance tech on site. 

And I have a lot of fun getting to really keep my head in the clouds, so to speak, and focus on you know, what we want long term culture to look like, long term, what kind of company do we want to be part of, and, and how we, how we find that, that mountaintop and how we get there, it’s a lot of fun these days that I get to have because I’ve got a great team that basically gets to do most of the decision making these days and it’s just and tell you what we need is It’s incredible to watch the leaders in our company, matriculate evolve and become just really fantastic examples in their different departments. How they make decisions, how they, how they manage others, and where they’ve taken this company, we call them to love it, I am

Whitney: Thinking the previous episode 166 we talked a little about your team and how you got to where you are and if not, we’ve got to do that so that’s awesome congratulations to you and your success and I know that’s you know, that’s a part of it just from your leadership ability and hiring the right people and making it happen and you’ve accomplished a lot but you know from your expertise you know, we’d love to dive into deal structure a little bit and maybe some things that are important about you know, how we structure deals how you’ve structured deals some ways Maybe you find that wouldn’t work and why you know for your company, but maybe they would others but maybe get us started with just some things about the deal structure that we need to to know when looking at deals.

Ivan: Yeah, so we can we can go the tag from how I structure deals with, with my investors with other people inside, inside the GP inside the general partnership, the folks that are in charge of the asset, you know, there’s a team inside that as well. We can take that route, if that works for you, whatever, whatever I can do to deliver some value to the audience.

Whitney: Yeah, that sounds good. Why don’t you just break down a deal? Yeah, that sounds good.

Ivan: Yeah, so a lot of syndicators out there. I think these days are doing it the same way. But you know, we look at it like we’re a private equity company, and that’s where I really first looked at this model. was one of the private equity companies doing out there, you know, whether it’s a business or real estate. And so we typically are going to look for a deal that will deliver a certain return threshold with a high degree of confidence to the investor right? For us, we pay a preferred return. And you know, that started in at nine went to eight. And is as the markets changed. And we’ve gone after newer and nicer assets that we do have to pay more for but that have lower risk, the preferred returns gone down. And again, that preferred return is what the investor makes before I start making any profit on the deal. So right now we pay a preferred return of 7%. And we’re actually only looking for deals where we can be current on the press. Meaning that 60 days after we deploy capital, after we close on that asset, we want to be able to pay 7% annualized divided by 12. On a monthly basis, we want to, we want to be able to send our investors checks.

Whitney: 60 days after close, you want to be ready to be able to perform.

Ivan: That’s right. That’s right. And that’s also new for us. You know, we’ve done quarterly, we’ve done semi-annually for our HUD deals, but we’re seeing a lot of demand in the marketplace for monthly returns, and we weren’t able to deliver that. And in order to do that, we’ve got to find those deals that are what we call a coupon clipper, they’ve already got cash flow, we’re getting to solve a few problems to increase income. add value, but there are far fewer problems to solve than, say, like a traditional value add deal. And so we’re looking for that 7% Plus, whatever split is on that deal, 70 75% to the passive investor, looking for those two numbers, to equal an IRR on a five to seven-year hold of anywhere from 14 or better. 

Typically 1718 percent is a good spot for us. If it’s a newer, nicer asset that we would mind hold longer, you know, we’ll look at a lower IRR, maybe a 15 or 16% annualized return over the whole period. And then we also look for that to match up with a return of capital multiple of invested capital, which a lot of investors want to see, right? So very simply put, I’m talking to you as an investor, Whitney, I’m looking to do two and a half to three and a half times what you invest in the deal netback to you, on a five, seven, or maybe a 10-year hold depending on that specific deal or how that fund is structured.

Whitney: You said five, seven, or 10 years or so you want to double their money within possibly five years, or I guess give us a different setup. I got it.

Ivan: Yeah, you’re exactly right. If I got to hold a 10, I want to be able to triple it is what most of my investors want to know is when are they going to get their money back, right. And so I tell them all the same thing. Listen, I’m going to try to target a five to seven-year exit, I’m gonna plan for a seven to 10-year hold in case we have to hold it longer. And so we want to own we want to target a deal that we wouldn’t mind owning for a longer period of time, right? We don’t want to have to sell if it’s a buyer’s market. If it’s a bad time to sell real estate, we want to buy more, not selling perfectly good cash-flowing income property.

Whitney: Makes sense. Yeah. So So I guess, back up a little bit, as far as you know, when you’re first getting a deal, and you’re, you know, what’s telling you which way to structure a deal, you know, and maybe we can go into, like how you’re going to split a deal. You know, I mean, so you’re gonna have your investment returns, you’re gonna have the pref that you’re, you know, you know, you’re gonna try to return to investors, you know, you want a cash-flowing asset. So then, you know, how do I determine, you know, if I want a 7030 split at 20? I mean, I hear people doing 50 now, or are not even doing preferred returns and just doing a split, you know, what are some ways that you’re thinking through that when your met your team’s underwriting deals? And looking at that and deciding that? Yeah, for

Ivan: us, it’s more, it’s more first finding out what our investors really desire at this stage in the market. And then finding deals to meet that desire, right. So we’re going to first look at what we’re hoping to deliver, say in our new fund, we’re looking to accomplish a monthly income stream capital appreciation on the back end, right? Because you’ve raised the value. And so that’s the types of deals we’re looking for right now. But you’re exactly right. There are so many different ways to skin that cat. I assess some developer friends. 

They take a lot more risk than I do. And sometimes you know, and they get a much higher payoff as well in the deals typically don’t pay out anything for the first three years perhaps. And so on those projects, what they’re usually structuring is like you, you mentioned earlier, no preferred return, and just a simple split. And depending on that deal, they’re doing a 5050 6040 8020, or I think I skipped 7030 there, but any of those manners are those combinations. And then some of the more sophisticated outfits, and we debate this all the time are providing or allowing for hurdles. 

So that’s a common term you hear in the business is a hurdle, which means, you know, after I’ve delivered you, say, a 12%, the split gets a little bit better to me, and it might change again, at 15, it might change again at 18. To where if we really hit it out of the park, I get a bigger share of the profit above that than a straight split. Which is pretty handy. When you’ve got more sophisticated investors, we pretty much like to keep it simple. And make it as clear and easy to read as possible for our investors. I think you asked me something else there. I’m at a loss. That’s our track on Yeah, just

Whitney: Thinking about your all process. And you know, when you’re underwriting a deal, when you see a deal, how you’re determining that you know, if it’s Yeah, but you answered, you know, it really depends on what your investors are looking for. And but you had talked about, you talked about how the preferred return is come down. And maybe could you elaborate on, you know, if somebody’s just listening, and they’re trying to figure out now, wait a minute, you know, why is it coming down? But you’re not the one I’ve heard across the board, you know, but can you just elaborate on why that’s coming down? And what do you see for the future, as far as these returns?

Ivan: Yeah, part of this is definitely market demand, there’s a lot of equity out there looking for yield, looking for a return on capital. And so demand overall is driving that down. But it’s also just simple economics. Interest rates have gone down as well. And so the spread between, you know, what you would call the risk free rate of the 10 year Treasury, which I think I looked at it this morning, it was 2.08, or 208, is I would say, in offering a prep mean, that of seven, you’re talking about 500 basis points spread between the risk free rates, and the preferred return not even taking into account the potential upside there on Capitol events getting into the teens. 

So to be able to come out of the gate, a seven versus a two is a pretty big risk premium, for the right to use your capital, if I’m marketing to you as a potential investor. And really, you know, our thesis right now is we’re solely focused on the newer 90s or younger assets that are already reasonably well run, that may benefit from a new management team and perhaps some new capital carries a lot less risk. Most of the investors I run across are whether they know it or not value investors, they’re really not speculators, and they hate to lose money. So rule number one for us is don’t lose the money. Rule number two is to remember rule number one. And rule number three is how do we get a good return on that? And that resonates with a lot of investors out there today?

Whitney: Are your deals very similar and how they’re structured? Or are there some times where you might do a hurdle waterfall, you know, and sometimes you want

Ivan: I know they’re, they’re pretty much similar with how we’re moving forward. You know, part of our structure now is a multi-asset VPN, it’s got some functions of a fund. It’s still got a defined time period with some extensions on the back end if needed. But it’ll be we are not our sole priority. But most of our focus, Whitney is going to be in that fun format. And we’ve drawn in a pretty tight little box as to what we can put in that fund. 

And so we’re looking for those, those flight to safety, defensive, low-risk assets, they’re in diversified markets, they’re, they’re newer, they’re well run. sure there’s some upside down the road, but there’s far less downside risk. And so, you know, the counterpart of that is, those deals probably aren’t going to hit north of 20% IRR, maybe one out of eight will, maybe two But they’re also not going to go bust, they’re very hard to, to screw up. There, they’re less susceptible to market forces. And that’s the position we want to be in at this late stage in the cycle.

Whitney: So, you know, when thinking about structuring a deal and thinking about and I guess, you know, you talked about the hurdles and talking about, and I felt like hurdles allow the sponsor to be paid more adequately, if he’s doing really well, right. Yeah. And so, you know, as thinking about what does an investor need to be thinking about when they’re, you know, or maybe some questions that you get maybe a little higher level from a more sophisticated investor when they’re looking at your deal structure that may be the common investor wouldn’t understand.

Ivan: Well, that wouldn’t be the case with me, because we work really hard to make our structure pretty simple. You know, so that the accredited investors not in the space, the physician, the dentist, right, the high paid salesperson that wants to be in real estate, but maybe not as sophisticated as say, the private equity fund, you know, that’s got hundreds of millions of dollars to place. So we want to keep it as simple as we can we’re in we’re really, really fortunate to have lots of investors that come along with us, and we’ve built those relationships over time. So we have to be careful not to get too complicated over time, or get to get too big in our britches, I think is the saying, I remember correctly.

But what we do see in, I guess, maybe your traditional real estate, private equity companies, or those guys that typically will only partner with larger institutions, you almost always see a hurdle there, you see returns based on an IRR calculation before the hurdles kick in, you see lots more decision language, a lot of things that take a lot of power and authority away from the sponsor. And you know, I just don’t want to do that, it’s, I’m supposed to be the chef in the kitchen, it’s my track, record that in my pain track record that we’re betting on. So having to get permission to put my shoes on. And in go run is it’s just not a spot I want to be in, I would rather continue to partner and grow my own client base of investors that trust what we do, and want to come along with us and put their capital, their hard-earned capital next to mine.

Whitney: And, you know, thinking about you talking about you all started a fund? And how does that change? How you might structure a deal? Or does it?\

Ivan: No, it does, it rhymes with what we’ve always been doing. But it definitely takes some more education for me, for me, to the investor to understand, there’s a wide spectrum of what fun can be and how it can look, and how it can operate. And so I have to do a lot of education. I’ve been on the phone for the last few months, helping my LPs, my investors understand exactly what we’re doing, why we’re doing it, why it’s an advantage to me, but also why it’s a great advantage to them. And so that that structure has changed quite a bit because predominantly, you know, my investors are no longer underwriting specific deals. new investors are coming along and they have to underwrite me as the sponsor in my team. Because you don’t necessarily get to pick and choose what deals you’re in, we do. 

So you’ve got to decide as an investor if that makes sense. And the way that I would look at it is really mediocre sponsor can rack a great deal pretty quickly. And a great sponsor can turn around a mediocre deal as well. And so I think most investors should be underwriting the manager, the person in charge of the deal, or the sponsor all the same thing. They’re much more intensely than they underwrite a given property.

Whitney: Great advice and what are some mistakes that could be made there so ours for not is in your fund specifically, but just in how you’ve seen people structure deals?

Ivan: Well, you know, it’s, it’s something that I did myself and that if I had a time machine, I would change. But it may not be that easy in today’s market, I would have charged more fees from the beginning. Now we instead of having been on the low end of the fee structure, we’re right in the middle of that bell curve, right? There’s plenty of people that are more expensive than me. And plenty less, we try to be right in the middle. And nobody’s really complained about it. What I did for the first several years was I basically grew this company on a property management revenue stream, because we have the property management in-house. 

And so I wasn’t charging much in the way of asset management fees or fund administration, disposition, refinance, all these things that take people, they take bandwidth and effort, right, and they take time. And, number one, good investors understand that, right? somebody that doesn’t understand that you need to make money along the way, he probably shouldn’t be in your investor group anyway. If they don’t, if they don’t get that, because it does cost money, and I can’t just work harder myself, I’ve got to surround myself with smart people. Right. And spoiler alert, if you pay them, well, they tend to stick around longer, they tend to do a better job. And by the way, you tend to attract better people. And so by right-sizing our fees, and in moving forward, we’re able to hire people and give them great tools, great resources in order for them to better or best execute their job descriptions.

Whitney: Could you, I guess, maybe elaborate on phase a little bit since you know, as somebody that’s maybe done a, maybe they’ve done one syndication, they’re just getting started, you know, how, you know, and they’re trying to maybe I’ve heard people’s mindset saying, you know, we want to keep our fees lower because we don’t have a track record or, you know, that type of thought, but, but, you know, what would you be your, your answer to that?

Ivan: Yeah, you know, it really depends on your market. In this, this is probably a capital raising call, type of question. But I’m going to answer now anyway, the best way to ensure that you raise enough capital for your deals is to stuff your pipeline full of potential investors always be stuffing that pipeline full of potential leads, everywhere you go, everybody, I’ve talked to, either as a potential investor or know somebody that is. 

And so the more you can, you can stuff that pipeline, the less definitely susceptible you are to losing somebody, you know, that you thought you had, because they thought you were over overcharging them on fees, right. So it’s more about setting your standards, setting your structure, and then finding investors that match that. So for me, it’s my job to be as transparent as I can with the investor. So that the investor who comes in all shapes and sizes and needs and wants and risk tolerances, and so on, can self-select if we’re a good fit.

Whitney: I like that being transparent from the beginning. So there’s not a big, not a big change or a big surprise. Six, yeah, we moved away. We cover the last two offerings, we’ve become more and more clear. Now. I think they’re all on one page. You know, in bold, hey, here’s, here are all the fees that come out of this deal. Here’s the list. So everybody knows what they are. And there are no surprises. And that way, you know, somebody can call me on it if they want to, and I can answer why. But to all you potential syndicators out there. If your fees are in the middle of the market already. Your good investors are good partners, which is what you want, really are going to be fine with it.

Ivan: Nice. So, you know, tell me about that one page again, you said that you put your face on there, I guess just so from the very beginning, there’s no, I mean like somebody is not having to ask for your underwriting and look down deep in the underwriting to figure out what your fees are.

Whitney: Correct? Yeah, we put that on a data page that’s got lots of data points on it, but then it’s got a specific area where it shows the project and fund-level fees. So everybody knows what we’re making.

Ivan: Wow. Well, I haven’t you know, I really appreciate your time. But is there anything else about deal structure specifically that you’d like to share with listeners?

Whitney: Yeah, you know, I would just, I would emphasize that that you the GP, the sponsor the deal, it doesn’t have to be just you. I know lots of syndicators out there that partner with other syndicators. I do mine in the house. I’m very lucky. My partner is the opposite of me. He’s much better at finding deals and managing our acquisition pipeline, and I sat His way and I’m more of what you might refer to as a capital raiser. 

And I just see lots of young well-equipped syndicators partnering with other syndicators and becoming more valuable as a team than they would be a part so I think this is a team sport and there are all kinds of ways to skin that cat and there are folks out there that will you know back you up financially for a piece of your deal there’s just you know, there’s really no obstacle to this business if you’re willing to learn not to give up and just continue to try and improve yourself a little bit every day.

Ivan: Great and what’s your best advice for taking care of investors or maybe one thing you do to stand out amongst other operators deliver bad news quickly let’s go multifamily there’s always something going on so if you can be transparent on that and let people know when things don’t go according to plan and how you’re going to fix it or pivot investors will trust you even more. You know, one of the very first deals I had with one investor wasn’t even syndication It was called syndication light, because we just had an operating agreement is a 35 unit deal. And Whitney, I think you know that some of this but it almost killed me. And everything that could have gone wrong on that deal went wrong. And we ended up selling it and doing about a 9% IRR on five years. 

So it wasn’t all bad. We didn’t lose money, we made a return far less than we had hoped. But the whole time I was honest and upfront with my investor did everything I could to keep him in the loop and let him know, you know, hey, we changed the plan again, we’re trying now that guy’s still with me today still investing six figures and in my deals, and happy to do it. And that’s translated into how we handle our investors now and in the future. And by doing that, you’re going to get a lot more investors that are willing to write bigger checks. most sophisticated investors, if you try to pretend like you’re batting 1000, or if you have not made mistakes, if you’re not upfront about those things, and honest, they’re gonna smell it anyway. And they might not tell you that, but they probably won’t invest with you.

Whitney: Appreciate that? I have no doubt you gotta let them know. Communication is key in most relationships. Yeah, absolutely. I’ve seen that one. So you know, you’ve been a great and a great guest. I appreciate your time again, being on the show. And tell the listeners how they can learn more about you and get in touch with you.

Ivan: It’s always great to be here with me. I appreciate you letting me ramble on here and there is a lot of fun. So I’m pretty easy to find if you spell my last name correctly. Barrett ba RR att. If you Google me, Ivan Barrett, you can find me. I’ve embedded an education website I put together for high net worth investors to learn more about me, my team, and our investment thesis. The corporate site is Barrett asset management’s got another website. I’ve been very calm. And you can call me at 317-762-2625 31776 to 2625. 

Whitney: Wow, appreciate you putting that out there. Not everybody puts their phone number out. So what an opportunity to listeners out to give him a call. And so thanks again, Ivan. I appreciate the listeners being with us today and every day, and I hope you’ll also go to LifeBridge capital and connect with me and go to the Facebook group, the real estate syndication show, so we can all learn from experts like Ivan and grow our businesses together. We’ll talk to each of you tomorrow.

Ivan: Thanks again.

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