Every syndicator claims that they have conservative underwriting

[Andrey Y.]

Every single syndication sponsor and capital raiser claims that they have conservative underwriting.

Now, I am no logician or statistician, but I have to call BS on this one. Not everyone can be telling the truth.

Clearly, at least half of these folks are mistaken in their claims.

Since 2011, you can make a lot of mistakes on a deal and the investors still made money. My question is, are there any key metrics that you use to determine whether these claims are true? Any specific numbers you plug into your own model, or questions you ask the syndicator?

Another thing that I see is some firms charging 3% of the purchase price as the asset acquisition fee or 2% as the asset management fee and disposition fee, and then they say this is industry standard. This one is much easier to vet as you can have a mental model for approximately what the standard fees and splits should be from looking at many deals. The average I am seeing for a typical deal is 2% AF, 1% MF, 0-1% refi, 1% DF. But I've definitely invested in deals with higher numbers than these, if there was a compelling reason to do so.

Would love to hear your guys thoughts on this.

[Brian Burke]

@Andrey Y. one of the dead giveaways is to compare the sponsor’s year 1 proforma and compare it to the property’s trailing 12 month historical performance.  If there is a big jump in the effective gross income, call BS.  If there is no jump in the property tax expense, and the state where the property is located reassesses on transfer, call BS. If the projected economic vacancy is less than 9% to 11% at a minimum, call BS. Ask for rent comps and see if the comps support the post-renovation rents. If they don’t, call BS. Look at the cap rate the sponsor is using to calculate the sale price on exit (if they even tell you)—if it is the same as market cap rates today, call BS. Those are quick checks that I do and it only takes a couple of minutes. Way too often I find more than one violation of the above.

Market fees are 2-ish percent acquisition fee (maybe higher on small deals like under 5 million and lower on larger deals, say over $30 million).  Asset management 1% of effective gross income.  Loan fees of 1% or less. Disposition fees of 1% or less.