What questions to ask syndicators when vetting their deals?

Question

I am in the process of searching out some syndications where I can be a limited partner. What sort of questions do you recommend to ask to vet the syndicator and the deal? What is a common split among GP's and LP's that is fair? What sort of things do you look for? I appreciate the help.

Chris Levarek · Answer

@Andrew Freed Recommend you audible or pick up a copy of "The Hands-Off Investor" by Brian Burke. Great book for a LP to hit the ground running.Or see this post : https://www.biggerpockets.com/...Or this post : https://www.biggerpockets.com/...

Marco Bario · Answer

First and foremost, you’re investing in the sponsors and the operators. I like investing with those who have enough personal and professional assets they can cover issues without capital calls. I also want to know they’ll be investing enough of their personal wealth in the deal I’m underwriting that our interests are aligned.And of course experience. I want a team that has significant experience in the asset class we’ll be investing in. Bonus: invested through the Great Recession and lived to tell about it. Finally, it’s not uncommon to perform a background check on sponsors and operators. Criminal, credit, lawsuits, etc. You need their social security number and permission to do so.

Duke Giordano · Answer

@Andrew Freed You are doing the right things asking questions, taking the time to learn the space. Take your education seriously, and dont underestimate its value when investing in syndications. In this current environment the market is froth with capitol and is allowing syndicators to get away with some thin margins on deals that could ultimately effect the downstream performance. I think Brian's book the Hands off Investor is a great resource, and there are many other resources and websites out there to help passive investors like yourself, me included. I was in your position several years back and taking the time for education is one you will not regret.

Paul Moore · Answer

@Andrew Freed I think you will love that book. It is written specifically for LP investors, not syndicators like most books (including mine). Since you are giving them your hard-earned capital, I would say it is worth it to book a flight to visit them at their office and spend some time with them. Get a gut feel for the way they treat people and the way people interact with them. See how they treat the waiter at the restaurant and how they speak about their wife and kids. Talk to investors and if you can find some who weren’t directly referred by them all the better. Do a full criminal check and a very thorough Google search. And check out what others say about them in places like Left Field Investors or Ian Ippolito’s Private Investor Club. Happy Investing!

Colton Hahn · Answer

Hey Andrew, The questions we get often times are about: 1. Track record for the sponsor: What sort of return has the sponsor been able to reliable generate, and is it net of fees? How many deals have gone full cycle? 2. Acquisition standards: What standards does the sponsor have for acquisition, how strict are they, and why the standards are that way. This is going to tell you if you are a good match for the sponsor. Remember this should be about finding the right sponsor FOR YOU. Everyone has different risk tolerance, make sure you are a good fit for them and vice versa. 3. Ask to speak with a current investor and if they allow that sort of thing. Hearing straight from a current investor is a great way to get a good feel for how the sponsor operates. These should be the questions everyone asks of their sponsors in my mind, and are the questions we get most often :)

Sam Silverman · Answer

1. Track record -- what is their history of performance, see full cycle exits in terms of actual returns vs projections. 2. Have they had to do a capital call ever? This is asking investors for a second round of funding after closing the deal.3. Have they ever missed a distribution?4. Distributions and reporting -- monthly/quarterly5. Fee structure (acquisition fee, asset management fee, disposition fee) -- what do they go to? If they are a one man stop, far less compelling to pay than if they have a full time staff where this is going to salaries and future ernest money deposits to win more deals in a competitive market. 6. Preferred return and GP/LP splits (along with any additional hurdles based on performance)7. What is the worst deal they have had? What did they learn from it?8. What % of the capital stack is from the GP?9. What type of loan product are they using and why? 10. How long until first distribution?11. What percent of their investors are repeat investors? If they haven't had a chance to have repeat investors it may be too soon.12. How do they evaluate deals and with what assumptions? Rent growth, economic vacancy, renovation budget, exit cap rate etc13. Flow of cash -- is there pref equity, different classes of shares etc14. Always ask for references -- happy to help if I can

Andrew Freed · Answer

@Paul Moore - Great points. With the minimum entry point being $50-$100K per transaction, a trip is a minimal expense to ensure your funds are in good hands. I'll definitely do this when I get involved with out of state syndicators. Many thanks! @Duke Giordano - I appreciate the reassurance and encouragement, thank you! Have any other book or website recommendations I should check out for my education?

Andrew Freed · Answer

@Colton Hahn - Great recommendations, especially asking for an investor reference. We do it with screening tenants all the time so it makes complete sense that it would be applicable to sourcing a syndication. @Marco Bario - I appreciate the advice. Ensuring someone has enough capital / reserves is incredibly important for any real estate investor. I never recommend anyone purchase real estate without significant reserves in case a major capex issue comes up, its honestly just expected when you buy property. Especially from landlords that did not maintain the property too well. When it comes to surviving the great recession, super useful tip. I think that showed us who were really the savvy investors vs. those who just got lucky. @Chris Levarek - Many thanks! Book ordered, I'm looking forward to reading it.