Advanced target Metrics Limited Partner in Syndication

[Duke Giordano]

Hey All,

Wanted to touch base on a few topics that are not typically discussed in relation to components of a RE syndication deal and how this impacts things from the standpoint of the LP in relation to such factors as risk profile, return etc.  I am trying to get a bit granular and would appreciate any input from experienced LP's and syndicators.  For the most part this is in relation to Multi-family, but i guess can be applied to other asset classes as well.  Thanks in advance for your time and insights.

1. Early LP Distributions: There are some syndicators who early on in a deal let the cash flow speak for itself in that cash flow is typically less early on in a deal, and then ramps up as business plan is implemented, and finally with Refi/Sale.  However, there are also other syndicators who raise extra capitol to pay investors in the beginning of the deal (in essence paying your own money back) and has the effect of more steady cash flow early on.  My questions is how does either of these structures impact the deal itself in relation to return/risk metrics if at all, and would you prefer one model vs the other?

2. Renovations/Cap Ex Budget: There are some sponsors who fund renovations with initial money raised as capitol/equity, and other sponsors who finance or take a bridge loan (less common Post-COVID) to fund renovations.  How does each of these models of funding renovations impact risk/return from the perspective of the LP and which one is there a preferred method to do so?

3. Post-COVID Reserves:  I am curious what sort of reserves an LP should be looking for in a syndication the Post-COVID era?  There are some reserves that may be required for agency (Fannie/Freddie) debt, and others the sponsor chooses to on their own raise to decrease risk for unforeseen circumstances.  I have see a few different metrics used for calculation of reserves such as dollar per door (such as maybe $500-1000 per unit/per year), versus setting aside 9-12 months of OpEx (Expenses and Debt), or a certain percentage of purchase price such as (1-5%).  I am curious what is the preferred structure of reserves to see in a syndication as an LP in this current climate from a syndicator?

4. Free Cash: When evaluating a deal risk profile do you look for a sponsor to have set aside "free cash", and what is the typical funding source of such (Capital/Equity raise vs Finance).  How does this free cash allocation relate to the above reserve questions one looks for?  Is it included or separate from the reserves calculation?

Thanks all, look forward to discussion.

Duke