Vetting a GM in a syndication Deal

[Ariel Gonzalez]

I've heard many horror stories from limited partners about the general manager they partnered with to do a deal and I noticed some commonalities in each story:

- Not following through with business plans

- Lack of communication

- Lack of accountability

I know LPs look for experience above all, but are there any other criteria that you look for in a GM that helps when getting into a syndication deal them? 

[Jason Allen]

are you able to do your own analysis on the deal the syndicators are proposing?

[Ariel Gonzalez]

Quote from @Jason Allen:

are you able to do your own analysis on the deal the syndicators are proposing?

 Yes I can, I ask this question simply out of curiosity. I invest in syndications as a general manager and I like to get a sense of what limited partners look for in syndications. 

[Brock Mogensen]

Track record, a strong deal, conservative underwriting, realistic returns, good debt terms. These are some of the things sophisticated LP's look for.

[Evan Polaski]

@Ariel Gonzalez, I can say that, from my perspective, General Partners experience is something that many groups were able to get around but many LPs are learning what experience is versus EXPERIENCE.  The groups that were founded in 2014-2017 have experience relative to those founded in 2021, but the syndicators that have been around since 1992 have EXPERIENCE.

I think the three things you outline follow the same train of thought.  There are many syndicators that had built a reputation for having executed business plans, very communicative, and accountable.  But all of this was when LPs were not diving deep because distributions kept coming monthly, an email was sent on a given day each month, and the only accountability needed was hitting projected returns, which was pretty easy in a bull market.

Now, with more scrutiny from LPs and distributions not coming, those surface level emails are proving to not be showing much.  The business plan is not being executed because they underbudgetted back in 2021, and when pressed for answers "interest rates and the market are hurting us, it isn't our fault". 

So, what do I look for: REAL experience measured in decades, not years.  Not to say young syndicators can't be great in the business, but I will let someone else prove the thesis with their money first.

And to be clear, I don't think experience only comes from being the GP in deals.  I am invested in syndications with groups that have only been around since 2021.  But, the founders of those groups spent decades in growing rolls within other companies before jumping out on their own. 

[Ariel Gonzalez]

Quote from @Evan Polaski:

I think the three things you outline follow the same train of thought.  There are many syndicators that had built a reputation for having executed business plans, very communicative, and accountable.  But all of this was when LPs were not diving deep because distributions kept coming monthly, an email was sent on a given day each month, and the only accountability needed was hitting projected returns, which was pretty easy in a bull market.

Now, with more scrutiny from LPs and distributions not coming, those surface level emails are proving to not be showing much.  The business plan is not being executed because they underbudgetted back in 2021, and when pressed for answers "interest rates and the market are hurting us, it isn't our fault". 

This is a great example of accountability, or the lack thereof. I read a book by Ray Dalio called "Principles," where he discusses embracing and learning from failures as much as, if not more than, successes. He explains that this process is a never-ending loop within a cycle.

When you mention how easy it is for GMs to blame the market, I assume they are not learning from those mistakes and therefore not increasing their knowledge within their cycle. Which ultimately leads investors' to lose confidence in them and of course their trust.

It sounds like most LPs prefer GMs who have been through multiple real estate cycles. This preference makes sense because if these GMs are still in business, it likely means they have developed strategies to maximize profits within different economic cycles.

[Ariel Gonzalez]

Quote from @Brock Mogensen:

Track record, a strong deal, conservative underwriting, realistic returns, good debt terms. These are some of the things sophisticated LP's look for.

 That makes sense. 

Any advice on achieving conservative underwriting in the market that we're currently in?

I know that location is a big factor in how conservative one can be. Not sure what the market is like in Milwaukee but in North Carolina, rents are declining at about a 1.5- 2% rate YoY and with the supply increasing, it seems as though they're not tapering off yet. 

[Marcus Auerbach]

Quote from @Ariel Gonzalez:

Quote from @Brock Mogensen:

Track record, a strong deal, conservative underwriting, realistic returns, good debt terms. These are some of the things sophisticated LP's look for.

 That makes sense. 

Any advice on achieving conservative underwriting in the market that we're currently in?

I know that location is a big factor in how conservative one can be. Not sure what the market is like in Milwaukee but in North Carolina, rents are declining at about a 1.5- 2% rate YoY and with the supply increasing, it seems as though they're not tapering off yet. 

We have a housing shortage. Milwaukee makes the top 5 in rent growth in every statistic I have seen this year. Take a look at the data from rentcafe. We have raised older leases 5% this year which is below market. We just listed a single family for $2,450 two days ago, which is pretty high for us and no shortage of applications.

[Evan Polaski]

@Ariel Gonzalez, I will also note that while there is a lot of very sound advice being presented here, including my own comments, none of this is actually measurable.  

As I note, track record.  Is 10yrs adequate?  Is 15?  Does it need to be 30?  Each investor will be different, but I don't think anyone will argue that more experience is WORSE than less.

Same with Conservative Underwriting.  This topic is always brought up on these forums and touted by syndicators.  But no one with half a brain would ever market themselves as "and we get very aggressive with our underwriting".  But what is conservative underwriting?  Is buying at a 5% cap rate today conservative, or is it an 8% cap rate?  If the 5 cap deal was an office tower in Hudson Yards, Manhattan is that better than an 8% cap rate on a 70's built multifamily in Class C area of DFW?  Is 4% rent growth conservative if CoStar is projecting 6% rent growth for that market for next 5 yrs?  2% would be more conservative, but who is to say one is right or wrong.

All of this comes back to what syndications really are: marketing.  You can market yourself and your deal as just about anything you want.  

"North Carolina has increasing supply, so rents are falling today.  Which is why it is a good time to buy.  Once the current glut of new supply is absorbed, there is nothing in the pipeline, creating a 3-5 yr window of lower competition.  So with population growth of 50,000/yr forecast to come in for the next 5 yrs, and only 70,000 new units being delivered, we are buying for a long-term hold based on the future fundamentals of the market.  Once the new supply is absorbed, and we are seeing rent growth again, which supply and demand is all but guaranteeing, not only will our project benefit from stronger rent growth, but also appreciation will accelerate as more buyers will come in helping drive up prices."

Alternatively, (and I don't know Milwaukee):

"Milwaukee is a great place to buy.  Population growth is remaining strong, and since this was not a "hot" market in the last run-up, there is limited new supply.  Being more affordable than the southeast, allows us to get in with a better basis and potential for growth as more people seek out affordable places to live with strong lifestyle amenities, and convenient travel available: major industries, all major sports, Delta Hub airport."

It really comes down to creating a message about you, your company, your deal that resonates with potential LPs and then spreading it widely.  

[Ariel Gonzalez]

Quote from @Evan Polaski:

@Ariel Gonzalez, I will also note that while there is a lot of very sound advice being presented here, including my own comments, none of this is actually measurable.  

As I note, track record.  Is 10yrs adequate?  Is 15?  Does it need to be 30?  Each investor will be different, but I don't think anyone will argue that more experience is WORSE than less.

Same with Conservative Underwriting.  This topic is always brought up on these forums and touted by syndicators.  But no one with half a brain would ever market themselves as "and we get very aggressive with our underwriting".  But what is conservative underwriting?  Is buying at a 5% cap rate today conservative, or is it an 8% cap rate?  If the 5 cap deal was an office tower in Hudson Yards, Manhattan is that better than an 8% cap rate on a 70's built multifamily in Class C area of DFW?  Is 4% rent growth conservative if CoStar is projecting 6% rent growth for that market for next 5 yrs?  2% would be more conservative, but who is to say one is right or wrong.

All of this comes back to what syndications really are: marketing.  You can market yourself and your deal as just about anything you want.  

"North Carolina has increasing supply, so rents are falling today.  Which is why it is a good time to buy.  Once the current glut of new supply is absorbed, there is nothing in the pipeline, creating a 3-5 yr window of lower competition.  So with population growth of 50,000/yr forecast to come in for the next 5 yrs, and only 70,000 new units being delivered, we are buying for a long-term hold based on the future fundamentals of the market.  Once the new supply is absorbed, and we are seeing rent growth again, which supply and demand is all but guaranteeing, not only will our project benefit from stronger rent growth, but also appreciation will accelerate as more buyers will come in helping drive up prices."

Alternatively, (and I don't know Milwaukee):

"Milwaukee is a great place to buy.  Population growth is remaining strong, and since this was not a "hot" market in the last run-up, there is limited new supply.  Being more affordable than the southeast, allows us to get in with a better basis and potential for growth as more people seek out affordable places to live with strong lifestyle amenities, and convenient travel available: major industries, all major sports, Delta Hub airport."

It really comes down to creating a message about you, your company, your deal that resonates with potential LPs and then spreading it widely.  

Exactly, I agree! That's what I am focusing on right now is building my brand and finding new ways to get our teams message across. 

Thank you!

[Ariel Gonzalez]

Quote from @Marcus Auerbach:

Quote from @Ariel Gonzalez:

Quote from @Brock Mogensen:

Track record, a strong deal, conservative underwriting, realistic returns, good debt terms. These are some of the things sophisticated LP's look for.

 That makes sense. 

Any advice on achieving conservative underwriting in the market that we're currently in?

I know that location is a big factor in how conservative one can be. Not sure what the market is like in Milwaukee but in North Carolina, rents are declining at about a 1.5- 2% rate YoY and with the supply increasing, it seems as though they're not tapering off yet. 

We have a housing shortage. Milwaukee makes the top 5 in rent growth in every statistic I have seen this year. Take a look at the data from rentcafe. We have raised older leases 5% this year which is below market. We just listed a single family for $2,450 two days ago, which is pretty high for us and no shortage of applications.

 It sounds like Milwaukee might have to be my next stop to buy property from!

[Gino Barbaro]

@Ariel Gonzalez

I would like to know how much capital, AKA, skin in the game they have. I Would like to know what their NOI growth has been the past five years. Many investors have sold deals in the past market cycle, and mad money purely through cap rate compression.

I would like to know how many deals they have gone full cycle.

I want a list of their team members, including CPA, Securities Attorney, Property Management company, and all the general partners on the deal.

LPs need to focus on their goals, and make sure their interests align with the sponsor.

Hope that helps

Gino

[Marcus Auerbach]

Quote from @Ariel Gonzalez:

Quote from @Marcus Auerbach:

Quote from @Ariel Gonzalez:

Quote from @Brock Mogensen:

Track record, a strong deal, conservative underwriting, realistic returns, good debt terms. These are some of the things sophisticated LP's look for.

 That makes sense. 

Any advice on achieving conservative underwriting in the market that we're currently in?

I know that location is a big factor in how conservative one can be. Not sure what the market is like in Milwaukee but in North Carolina, rents are declining at about a 1.5- 2% rate YoY and with the supply increasing, it seems as though they're not tapering off yet. 

We have a housing shortage. Milwaukee makes the top 5 in rent growth in every statistic I have seen this year. Take a look at the data from rentcafe. We have raised older leases 5% this year which is below market. We just listed a single family for $2,450 two days ago, which is pretty high for us and no shortage of applications.

 It sounds like Milwaukee might have to be my next stop to buy property from!

Milwaukee is on a solid trajectory, but also comes with a lot of challenges for investors. The market is quite competitive, most offers are over list price. Inventory is old, mostly 1920s and 1960s. And most deals don't make sense as-is before you develop them - upgrading units / increasing rents. 

I am bullish for the next 10 years, long term there should not be a reason for MKE RE to be valued below the US average. Downtown has seen more than 6 billion dollars in re-dvelopment over the last 10y and now our freeway system is getting a massive expansion that should wrap up next summer. Look Milwaukee up on YouTube.

[Jim Pfeifer]

The good news is that it's going to be a lot easier to vet a quality GP in the next few years than it has been in the past.  Experience is key for sure - but there is also the reality of LPs needing to allocate capital and the number of experienced operators available to invest with will likely be smaller than the LPs who want to invest.  As @Evan Polaski said there are different kinds of experience and we will be going into a cycle where any operator who has been around longer than five years will have experience in a tough market.  My "experience" evaluation will take into account how they made it through the markets from 2019 to 2025 - that will tell you a lot.

I will be looking at how the operator handled their deals during this time, how they communicated during this time and what they learned.  Prior to 2022, it was difficult to find an operator who didn't make a lot of money on their real estate syndications.  At the same time, there just weren't that many operators serving LPs who had been doing this long enough to have gone through turbulent markets.  The 2012 Jobs Act is what made syndication investing more accessible so it was smooth sailing in this industry for a decade.  Now it's not - - cue the Warren Buffet quote about when the tide goes out you see who is swimming naked.  

The key for me will be to evaluate how they came through these difficult times.  Did they stop distributions or have a capital call?  These will not be disqualifying for me - I will want to understand it in context.  There is a difference between an operator who did not communicate any problems until the email about the capital went out and the operator who was constantly updating investors on the asset and the difficulties and challenges and preparing investors for the possibility of a capital call prior to actually going through with a capital call.

I think the biggest lesson I have learned as an LP over the past few years is that I will absolutely require consistent, thorough and realistic communication from any operator I invest with.  My due diligence will include reviewing past reports - on assets that performed and those that didn't.  I have always put communication as one of the top criteria for operators, but I also excused those who were poor communicators but had "good" deals.  I am paying for that now.

I will also do all of the other due diligence prior to investing - experience of the operator, referrals from those in my Community and network who have invested with the operator, responsiveness and other factors - but proof of effective communication will remain a priority for me.  I will also remember to be patient - it's ok to invest the minimum and wait a year or two before getting into a deal with the same operator.  Patience would have avoided a lot of the current pain.

Syndication investments are long-term, illiquid investments completely out of your control.  If you don't choose an operator who will effectively and honestly communicate with you, then you will be a frustrated, and likely poorer investor.

[Ariel Gonzalez]

Quote from @Jim Pfeifer:

The good news is that it's going to be a lot easier to vet a quality GP in the next few years than it has been in the past.  Experience is key for sure - but there is also the reality of LPs needing to allocate capital and the number of experienced operators available to invest with will likely be smaller than the LPs who want to invest.  As @Evan Polaski said there are different kinds of experience and we will be going into a cycle where any operator who has been around longer than five years will have experience in a tough market.  My "experience" evaluation will take into account how they made it through the markets from 2019 to 2025 - that will tell you a lot.

I will be looking at how the operator handled their deals during this time, how they communicated during this time and what they learned.  Prior to 2022, it was difficult to find an operator who didn't make a lot of money on their real estate syndications.  At the same time, there just weren't that many operators serving LPs who had been doing this long enough to have gone through turbulent markets.  The 2012 Jobs Act is what made syndication investing more accessible so it was smooth sailing in this industry for a decade.  Now it's not - - cue the Warren Buffet quote about when the tide goes out you see who is swimming naked.  

The key for me will be to evaluate how they came through these difficult times.  Did they stop distributions or have a capital call?  These will not be disqualifying for me - I will want to understand it in context.  There is a difference between an operator who did not communicate any problems until the email about the capital went out and the operator who was constantly updating investors on the asset and the difficulties and challenges and preparing investors for the possibility of a capital call prior to actually going through with a capital call.

I think the biggest lesson I have learned as an LP over the past few years is that I will absolutely require consistent, thorough and realistic communication from any operator I invest with.  My due diligence will include reviewing past reports - on assets that performed and those that didn't.  I have always put communication as one of the top criteria for operators, but I also excused those who were poor communicators but had "good" deals.  I am paying for that now.

I will also do all of the other due diligence prior to investing - experience of the operator, referrals from those in my Community and network who have invested with the operator, responsiveness and other factors - but proof of effective communication will remain a priority for me.  I will also remember to be patient - it's ok to invest the minimum and wait a year or two before getting into a deal with the same operator.  Patience would have avoided a lot of the current pain.

Syndication investments are long-term, illiquid investments completely out of your control.  If you don't choose an operator who will effectively and honestly communicate with you, then you will be a frustrated, and likely poorer investor.

Firstly, this was really well said so thank you!

I appreciate your insight on proactively communicating with your investors in both good and especially bad times. I believe that having the discipline and humility to have those hard conversations really say a lot about someone. It relieves me to hear that it's placed so high on your list of criteria. 
 

[Ariel Gonzalez]

Quote from @Marcus Auerbach:

Milwaukee is on a solid trajectory, but also comes with a lot of challenges for investors. The market is quite competitive, most offers are over list price. Inventory is old, mostly 1920s and 1960s. And most deals don't make sense as-is before you develop them - upgrading units / increasing rents. 

I am bullish for the next 10 years, long term there should not be a reason for MKE RE to be valued below the US average. Downtown has seen more than 6 billion dollars in re-dvelopment over the last 10y and now our freeway system is getting a massive expansion that should wrap up next summer. Look Milwaukee up on YouTube.

Thanks for the tip! I appreciate all your insight. 

[Ariel Gonzalez]

Quote from @Gino Barbaro:

@Ariel Gonzalez

I would like to know how much capital, AKA, skin in the game they have. I Would like to know what their NOI growth has been the past five years. Many investors have sold deals in the past market cycle, and mad money purely through cap rate compression.

I would like to know how many deals they have gone full cycle.

I want a list of their team members, including CPA, Securities Attorney, Property Management company, and all the general partners on the deal.

LPs need to focus on their goals, and make sure their interests align with the sponsor.

Hope that helps

Gino

 It's very helpful thank you!

[Ian Ippolito]

Quote from @Ariel Gonzalez:

I've heard many horror stories from limited partners about the general manager they partnered with to do a deal and I noticed some commonalities in each story:

- Not following through with business plans

- Lack of communication

- Lack of accountability

I know LPs look for experience above all, but are there any other criteria that you look for in a GM that helps when getting into a syndication deal them? 

Ariel, When vetting a syndication, every investor will do it differently because every investor has a different risk tolerance, comes from a different financial situation and has different financial goals. So a deal that look great to one investor will look horrible to another and vice versa.

I'm a very conservative investor and may look through a hundred deals a month, and at the end of the year only invest in 4-5. Here's how I do my due diligence:

1) Portfolio matching: (takes 30 seconds per deal)

a) Have an educated opinion on where I think we are in the real estate cycles (financial and physical market cycles)

b) Then and only then do I pick the strategies, capital stack, and specialized asset subclasses that make sense for that opinion. For example, I am a little concerned about some aspects of the business cycle recovery and a potential for a double-dip so I lean toward the safest part of capital stack which is debt (or low-debt equity). I won't go with the riskiest opportunistic strategies, and will stick to core and core plus mostly with some value-added. I won't be investing in the riskiest/most supportable asset subclasses such as hotels, and tilt my portfolio the ones that have historically been more stable such as multifamily and single-family housing. I also don't want refinancing risk, so any deals with only 3 to 5 year debt are out for me. For someone that's not as conservative, or a different view on the cycle, they might have a different opinion than me on all of this.

2) Sponsor quality check: (takes about 45 minutes per deal)

I believe that a great sponsor can take an average looking deal and make it great, and that in mediocre sponsor can take a fantastic looking deal and make it bad (especially if there is a severe recession). So I start with the sponsor first. Again, others might disagree.

a) Track Record: Get the entire track record for the strategy. As easy as this sounds, it's not simple and usually like pulling teeth. Many times they will claim it's wonderful and then try to hide their worst deals by only showing completed deals. Make sure to get unexited deals. Or if they are doing value-added multifamily, they will show you their hotel experience. That doesn't cut it for me. I want a specialist that's an expert, and not a jack of all trades and master of none. Also, in a mainstream asset class like value-added multifamily, I see no reason to take a risk on a sponsor that doesn't have full real estate cycle experience or that lost anything more than a small amount of money (and prefer no money lost). Again, other might feel differently here.

b) Skin in the game: as a conservative investor, I understand that the dirty secret of industries that the waterfall compensation is in the line with me and incentivizes sponsors to take more risk. So I require skin in the game (average is 5% to 15%) to offset this. Contrary to popular belief, this is not set because I believe it will give me a higher return. I believe it tends to give me a slightly lower return, because the sponsor is going to be more careful, and if there is a severe downturn will prevent me from taking catastrophic losses. Someone that is more aggressive, may want lesser even though skin in the game. Also, if the sponsor is new, I am fine with less skin in the game as long as it is significant to their net worth. On the other hand if they are a sponsor that is experienced in stopping a skin in the game, that's a huge red flag for me.

c) how open to scrutiny are they? I always discuss investments with others in an investor club because other people might think of things that I might miss. And even though virtually every sponsor agreement allows me to share investment information with others who might be advising me on it (especially when club members are bound by an NDA), I still ask the sponsor if I can share it, because it's a test. Most are fine with that, but a few will have problems with it and claim there are legal issues, etc.. That's a red flag for me.

d) death by Google: I Google everything I can about the sponsor. I check the SEC, FINRA, ratings websites for inside information on the principals in the company. I also look for lawsuits and see what happened in them. Many times it's an easy red flag. Sometimes it's ambiguous, but even then, why should I bother with the company that has numerous unresolved lawsuits, versus another company that is virtually the same but has none. Again, others might feel differently here.

3) property level due diligence: (takes seconds to weeks per deal): here is where I drill in with the low-level details.

a) pro forma popping: I examine all the assumptions, and see if they are overoptimistic or not. I look at every single item in the pro forma and imagine that it is complete BS, and see if I can challenge it. If there's a hole, it may be a red flag.

b) sensitivity analysis: I examine all the assumptions, and make sure I can live with the worst case scenarios.

c) "Stall and see": if they are getting money over multiple years, and there is no penalty for investing later, I would usually wait so I get some real performance data, versus having to look at theoretical pro forma information.

d) Recession stress test: I will not invest in anything, until I subject it to recession level stress and see if I can live with the result. And I take the worst recession I can find in the recent past. Sometimes there is only great recession data, and that recession was pretty mild on some asset classes, versus previous recessions. So I will usually 1.5x or 2.0x the stress. If the deal collapses and I would lose everything, I'm out. Others might be fine with taking risk, but least by doing this a person can get an idea of what might go wrong.

e) Legal document analysis: it will usually take a few days to go through the legal document properly, as almost inevitably there are tons of gotchas that either have to be explained, or mitigated with a side letter.

That is the very short summary of what I do. If you want more information, p.m. me and I can give you a lot more details.

[Jason Allen]

Quote from @Ariel Gonzalez:

Quote from @Jason Allen:

are you able to do your own analysis on the deal the syndicators are proposing?

 Yes I can, I ask this question simply out of curiosity. I invest in syndications as a general manager and I like to get a sense of what limited partners look for in syndications. 

 I'd say past successes will be the best criteria to look for. I have seen development syndications that go years without even breaking ground. So, I'd caution against inexperienced syndicators. Additionally, I'd even expect deviations from business plans with experienced syndicators. Construction/rehabilitation timelines rarely go as initially indicated. 

[Ariel Gonzalez]

Quote from @Ian Ippolito:

Quote from @Ariel Gonzalez:

I've heard many horror stories from limited partners about the general manager they partnered with to do a deal and I noticed some commonalities in each story:

- Not following through with business plans

- Lack of communication

- Lack of accountability

I know LPs look for experience above all, but are there any other criteria that you look for in a GM that helps when getting into a syndication deal them? 

Ariel, When vetting a syndication, every investor will do it differently because every investor has a different risk tolerance, comes from a different financial situation and has different financial goals. So a deal that look great to one investor will look horrible to another and vice versa.

I'm a very conservative investor and may look through a hundred deals a month, and at the end of the year only invest in 4-5. Here's how I do my due diligence:

1) Portfolio matching: (takes 30 seconds per deal)

a) Have an educated opinion on where I think we are in the real estate cycles (financial and physical market cycles)

b) Then and only then do I pick the strategies, capital stack, and specialized asset subclasses that make sense for that opinion. For example, I am a little concerned about some aspects of the business cycle recovery and a potential for a double-dip so I lean toward the safest part of capital stack which is debt (or low-debt equity). I won't go with the riskiest opportunistic strategies, and will stick to core and core plus mostly with some value-added. I won't be investing in the riskiest/most supportable asset subclasses such as hotels, and tilt my portfolio the ones that have historically been more stable such as multifamily and single-family housing. I also don't want refinancing risk, so any deals with only 3 to 5 year debt are out for me. For someone that's not as conservative, or a different view on the cycle, they might have a different opinion than me on all of this.

2) Sponsor quality check: (takes about 45 minutes per deal)

I believe that a great sponsor can take an average looking deal and make it great, and that in mediocre sponsor can take a fantastic looking deal and make it bad (especially if there is a severe recession). So I start with the sponsor first. Again, others might disagree.

a) Track Record: Get the entire track record for the strategy. As easy as this sounds, it's not simple and usually like pulling teeth. Many times they will claim it's wonderful and then try to hide their worst deals by only showing completed deals. Make sure to get unexited deals. Or if they are doing value-added multifamily, they will show you their hotel experience. That doesn't cut it for me. I want a specialist that's an expert, and not a jack of all trades and master of none. Also, in a mainstream asset class like value-added multifamily, I see no reason to take a risk on a sponsor that doesn't have full real estate cycle experience or that lost anything more than a small amount of money (and prefer no money lost). Again, other might feel differently here.

b) Skin in the game: as a conservative investor, I understand that the dirty secret of industries that the waterfall compensation is in the line with me and incentivizes sponsors to take more risk. So I require skin in the game (average is 5% to 15%) to offset this. Contrary to popular belief, this is not set because I believe it will give me a higher return. I believe it tends to give me a slightly lower return, because the sponsor is going to be more careful, and if there is a severe downturn will prevent me from taking catastrophic losses. Someone that is more aggressive, may want lesser even though skin in the game. Also, if the sponsor is new, I am fine with less skin in the game as long as it is significant to their net worth. On the other hand if they are a sponsor that is experienced in stopping a skin in the game, that's a huge red flag for me.

c) how open to scrutiny are they? I always discuss investments with others in an investor club because other people might think of things that I might miss. And even though virtually every sponsor agreement allows me to share investment information with others who might be advising me on it (especially when club members are bound by an NDA), I still ask the sponsor if I can share it, because it's a test. Most are fine with that, but a few will have problems with it and claim there are legal issues, etc.. That's a red flag for me.

d) death by Google: I Google everything I can about the sponsor. I check the SEC, FINRA, ratings websites for inside information on the principals in the company. I also look for lawsuits and see what happened in them. Many times it's an easy red flag. Sometimes it's ambiguous, but even then, why should I bother with the company that has numerous unresolved lawsuits, versus another company that is virtually the same but has none. Again, others might feel differently here.

3) property level due diligence: (takes seconds to weeks per deal): here is where I drill in with the low-level details.

a) pro forma popping: I examine all the assumptions, and see if they are overoptimistic or not. I look at every single item in the pro forma and imagine that it is complete BS, and see if I can challenge it. If there's a hole, it may be a red flag.

b) sensitivity analysis: I examine all the assumptions, and make sure I can live with the worst case scenarios.

c) "Stall and see": if they are getting money over multiple years, and there is no penalty for investing later, I would usually wait so I get some real performance data, versus having to look at theoretical pro forma information.

d) Recession stress test: I will not invest in anything, until I subject it to recession level stress and see if I can live with the result. And I take the worst recession I can find in the recent past. Sometimes there is only great recession data, and that recession was pretty mild on some asset classes, versus previous recessions. So I will usually 1.5x or 2.0x the stress. If the deal collapses and I would lose everything, I'm out. Others might be fine with taking risk, but least by doing this a person can get an idea of what might go wrong.

e) Legal document analysis: it will usually take a few days to go through the legal document properly, as almost inevitably there are tons of gotchas that either have to be explained, or mitigated with a side letter.

That is the very short summary of what I do. If you want more information, p.m. me and I can give you a lot more details.

 This is very insightful information.

Thank you!

[Ariel Gonzalez]

Quote from @Jason Allen:

Quote from @Ariel Gonzalez:

Quote from @Jason Allen:

are you able to do your own analysis on the deal the syndicators are proposing?

 Yes I can, I ask this question simply out of curiosity. I invest in syndications as a general manager and I like to get a sense of what limited partners look for in syndications. 

 I'd say past successes will be the best criteria to look for. I have seen development syndications that go years without even breaking ground. So, I'd caution against inexperienced syndicators. Additionally, I'd even expect deviations from business plans with experienced syndicators. Construction/rehabilitation timelines rarely go as initially indicated. 

When deviations occur from initial business plans in real estate syndications, is there any legal recourse to consider and if so, what strategies does one implement, if any, to help mitigate it?