Key Prinicipal - what exactly is it?

[Kevin Nguyen]

An investment group found a 140 unit apartment complex valued at about 8 million.  They opened up the opportunity to be a KP to the public, however they are selective.  As far as responsibilities, it seems that it allows me to be hands-on with property operations.  It seems like a very good opportunity for me to dive in and learn....too good.  Why?  I have no experience. 

I've read (on the forums) that Key Principals are usually brought in because the lender requires a person with more experience OR a person with more liquid net worth to be on the loan.  However, none of these requirements were listed to be a KP in this deal.  Plus investment to be a KP in this deal is low -- well below 100k.  

Is there a traditional or standard role for KPs in apartment investing? 

[Shane Thomas]

Key Principals (KPs) are also known as Guarantors and is a term used by Agency lenders (Freddie Mac and Fannie Mae) on non-recourse commercial loans. Although agency loans are non-recourse, there are certain "bad-boy" carve-outs (e.g. misrepresentation, bankruptcy, etc.) that could grant the agencies recourse against the KPs. There are a number of criteria to qualify for a agency loan but 3 major ones are past experience, net worth of KPs > loan amount and some liquidity threshold.

Typically, the sponsors of the deal are automatically considered KPs and usually they have the past experience but sometimes don't meet the net worth or liquidity requirements. In such event, KPs can be added to help the sponsors meet the requirements.

In most deals I have been involved in as a passive, non-sponsor KPs do not have an active role in managing the asset. The KPs are typically passive investors. In certain cases, KPs could be compensated for what they bring to the table and in other cases they may not. Sometimes sponsors meet all the requirements but still bring on KPs so that the KPs can get "agency" experience, which will help them when they sponsor their own deal and apply for a loan. In the end, the structure of how KPs are used and compensated depends on the situation. However, it is important for KPs to understand their role and potential risks (due to the carve outs) and should certainly understand the business plan and track record of the sponsors they are working with.

I hope this helps. 

[Tamiel Kenney]

@Kevin Nguyen  I agree with Shane!  Two additional points…I would find out if the people in the investment group are signing on the loan and if not, why.  Also, just as an FYI…general rule of thumb is…the sponsor group needs to have a combined net worth equal to 100% or more of the loan amount and 10% or more post liquidity.  Just a note…if you are assuming a loan, then is it not uncommon where the lender will require ONE person in the group has to meet the net worth and post liquidity requirements.

[Michael Le]

@Kevin Nguyen I've seen that investment group spam their deal across all manner of social media. And from what I understand they are going to be doing this deal as a 506(b) syndication, so their advertising is a huge no-no. To me it seems like they are trying to find a way around the no advertising rule by making it seem like this is a search for KPs but I don't think that will fly either. This seems like a fishing expedition.

As Shane said, agency loans are non-recourse but guarantors on the loan (and a KP would be one) can be susceptible to the loan going recourse due to actions of the sponsor. So given that these guys are already doing some questionable things, just be sure you vet them properly. What is their experience and background? Why are they looking for KPs from random people on the Internet and not from within their own existing network?

As for KP investment, $100k seems fine. There is not generally a requirement for the KPs to make large investments because generally the KPs are bringing their net worth, liquidity, and experience to the deal.

One last thought, lenders determine if KPs are required and they do not like to have too many because they have to do very detailed underwriting and background check on each KP. Be prepared to have your financial and personal life dug into very deeply.

[Lane Kawaoka]

Kevin Nguyen Michael Le is right this is a huge red flag. I saw this in a Meetup in seattle. Stay away. Only work with people you know like and trust even if you are just a LP passive investor on a syndication.

[Steeve Breton]

@Kevin Nguyen   I actually met the sponsors (Three Pillars) of this deal at a meetup in Boston a couple of weeks ago and had a call with them to dig into the details.  They are looking for a few KPs to help with Net Worth and Liquidity.  They personally have little experience but do have a friend/relative with investment and property management experience so they won't need your involvement there.  I did my own underwriting of the deal itself, using the rent role and actual expenses, and it is solid. Could be a great success. My concerns were threefold:  

1. At the time they were planning on using a recourse loan.  If the deal goes south for any reason the bank will come after any/all KPs looking for the full $6mm.  I have too much to lose.  At first they were pretty flippant about this concern but softened when I explained that both of my mentors told me they'd never get their investors to sign on a recourse loan. 

2. Sponsor's compensation is heavily fee based.  It is also font loaded.  This does not align well with investors and the long term success/profitability of the project. 

3. KPs would not be adequately compensated for the risk.  

I told them if they can correct these 3 issues I'd consider signing on as a KP.  I wouldn't say "stay away" but certainly "buyer beware" on this sort of thing.  As with all things in this space, you have to do diligence and then decide for yourself if the risk/reward is worth it.

[Anders Jax]

Originally posted by @Steeve Breton:

@Kevin Nguyen   I actually met the sponsors (Three Pillars) of this deal at a meetup in Boston a couple of weeks ago and had a call with them to dig into the details.  They are looking for a few KPs to help with Net Worth and Liquidity.  They personally have little experience but do have a friend/relative with investment and property management experience so they won't need your involvement there.  I did my own underwriting of the deal itself, using the rent role and actual expenses, and it is solid. Could be a great success. My concerns were threefold:  

1. At the time they were planning on using a recourse loan.  If the deal goes south for any reason the bank will come after any/all KPs looking for the full $6mm.  I have too much to lose.  At first they were pretty flippant about this concern but softened when I explained that both of my mentors told me they'd never get their investors to sign on a recourse loan. 

2. Sponsor's compensation is heavily fee based.  It is also font loaded.  This does not align well with investors and the long term success/profitability of the project. 

3. KPs would not be adequately compensated for the risk.  

I told them if they can correct these 3 issues I'd consider signing on as a KP.  I wouldn't say "stay away" but certainly "buyer beware" on this sort of thing.  As with all things in this space, you have to do diligence and then decide for yourself if the risk/reward is worth it.

 What do you charge for being a key principal?

[Steeve Breton]

Seems to be the norm to charge 5-10% of the GP for guaranteeing the loan (bringing your net worth to the deal).  Depends on deal size.  I would charge more if the sponsor is relatively inexperienced, assuming you are more experienced and it's likely that you'll have to play a more active role.  That additional "Charge" would not be as KP.  For the more active role you'd look to receive additional GP equity/fees for due diligence, asset management, etc.  

[Daniel Spear]

So I was a Key Principal on a Three Pillars deal  and I did not sign on the mortgage note or put up any of my own  net worth or liquidity. That came from the TPCG principal team itself. As a KP I was not subject to any mortgage risk.

I'm not sure how other companies structure their KP opportunities, but at Three Pillars mortgage risk was not part of the equation. 

[KP Capehart]

@Daniel Spear what was your experience with Three Pillars? I too have spoken with them over the phone to find out more info, but decided to hold off. That was about a year ago. Since then, I have connected with a fellow investor that did work with them and had a good experience. What is your take? Care to share any details? Did you learn a lot? Thanks for any insight!

[Marcus House]

I have worked with Theee Pillars.  Feel free.to message me.

[Todd Dexheimer]

Sounds like an inexperienced group to me. Do business with people that you know, not someone that is advertising.