ANSWER

For shortfalls and unexpected challenges, all syndicates should have a contingency or operating fund. If renovations are planned, we like to use a 10% - 20% of the renovation budget to be our benchmark for the operating fund. When fielding sponsors, ask them how much upfront money they’ve budgeted to cover potential shortfalls. The unexpected happens when you’re not expecting it – such as maintenance issues, low occupancy, insurance payments, etc. We abide by 1% to 3% of the purchase price. You may also ask them how much money they budget each year to a reserves account. We reserve $250 to $300 per unit per year. For example, a 100-unit apartment community should save $25,000 to $30,000 as reserves. Beware if the operating fund doesn’t account for shortfalls, as the sponsor may reach out to his limited partners for additional capital if an issue does arise.

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