Syndication Changes During COVID

[Duke Giordano]

Hello All,

I am curious for some perspective from both the GP side (How you are looking at future deals) as well as, the LP side in what you are also looking for from a criteria standpoint in a future upcoming deal both the short and Mid-term over the next 3-6 months range in relations to specific underwriting criteria, and return criteria and how it has changed post COVID.

For example some deal criteria that may be different for me due to COVID from an underwriting and return standpoint:

Property Class: Looking more at class B now vs Class A or C

Property Expense Ratio: Probably looking more in the 40-45% as opposed to 50-55%.

Cash Flow: Want to see underwriting that is cash flow focused as opposed to more upside.  Not sure how this would be able to be evaluated except the section of a PPM that looks at hypothetical investment.

Rent Increase Assumption: this will be effected when putting off value add plays, maybe look at 0-1% now as opposed to 2-3%.

Renovation per unit: was looking at 3-8 K per unit, maybe now looking at more like 3-5K per unit.

Break Even Occupancy: was looking at 65-70%, now prefer to see closer to 50-60%

Reversion Cap Rate: Previous was looking at 0.5-1.0 over initial, now looking more at 1.0-1.5x

Loan to Value: Prior Criteria was <65-75%; now lloking more for 60-65%.  Also would be much more hesitant with Bridge debt at the moment.

Reserves for GP: was looking for 3-6 months of Debt+Expenses, now probably looking 6-9 months or 6-12 months (Debt+Expenses) as reserves.

Return criteria (Pref, IRR, Eq Multiple): not sure how this will be effected but still looking for similar number 7-8 Pref, 14-16 IRR, 1.9-2.1 Eq Multiple. Numbers need to make sense with meeting above criteria (more conservative underwriting).

GP Fees: Not sure if this situation will change GP Fee structure or how I look at alignment of interest.  Such as acquisition fee, Asset Mgmt fee etc.?

GP Skin in the game: I know this has been debated quite a bit.  Not sure if people (LP's) are looking at different criteria now then in the past?

Thanks in advance for your time and discussion.