How to GP in Syndication deals feel about Questionnaire sheets?

Question

Hello All,Thanks in advance for your replies. I am curious to get peoples opinion on both the GP and LP side in syndication deals as to how they feel about receiving a questionnaire sheet from a new prospective LP to get objective info to get to know the Sponsor and the deal? I would be curios to hear from both GP/Sponsors, as well as, LP who have done this and how it was received. Do people (GP'S) get offended? Not respond? Or do GP/sponsors like this as it indicates a thorough and well thought out LP who understands the risk/implication in a deal and the due diligence on a sponsor required?I base a large deal of weight as I am sure many LP's do on the sponsor and feel that in addition to either a phone call or a meet up in person, a questionnaire sheet would seem a more efficient way to ask and get answers to common objective questions ahead of time to get an idea on a sponsor. For those LP feel free to add other questions you think may be important/salient. For example:Sponsor Experience: How many years have you specifically been a GP in syndication deals? What year did you start?How many full cycle Syndication deals have you seen through as a GP? What years were the full cycle Syndication deals sold?What states were each of this Syndication deals in?What were the expected vs actual return metrics of those full cycle deals, such as IRR, Equity Multiple, Hold time etc?How many active current/active syndication deals do you have as a GP? What states are they in?What asset class to you look at or focus on as a syndicator (Multi-Family, self-storage, mobile home, retail, industrial etc).What is your strategy as a syndicator (Value add, stabilized etc). What typical Class in relation to multifamily do you focus on (Class A,B,C etc). Deal Location/Strategy: Geographic locationStrategy (Value Add etc)Property Class if Multi-Family (A.B.C)Number of UnitsNumber of planned Units Renovations if Value Add? Reno cost per Unit?Planned Monthly Rent Growth per Unit?Current Cap Rate? Planned Exit Cap/Reversion Cap Rate?Planned Hold time?Current Occupancy rate?Break Even Occupancy rate of deal once Value add complete? Deal Loan/Financing: Type of Loan such as I/O (interest only), flat rate etc.Is loan a non-recourse Fanni/Freddie?Length of loan?Rate on loan?Is there bridge loan/debt?What is Loan to Value Ratio (LTV)?What is Debt Service Coverage Ratio (DSCR)? Deal Fees: All GP Fees for deal?Acquisition Fee and if so %?Asset Management Fee?Disposition Fee?Refinance Fee if Refi Occurs? Deal Return: Preferred Return and %?If Preferred return, when does it start? Is it Cumulative?Is preferred return given after or before fees such as Asset Mgmt fee (Excluding Acquisition Fee)?Is preferred return given of or off Capitol? Does Capitol account $ amount change as preferred return given?Is there a waterfall structure after preferred return and if so what is it? What’s GP/LP split? Is there a ladder of GP/LP Split?IRR? IRR with Different Hold times such as 3, 4, 5 years?Partitioned IRR if available?Equity Multiple?

Brian Burke · Answer

The substance of your checklist is great—and you should have every one of your questions answered (whether on this list or not) before you sign any big checks to a syndication investment.That said, how you implement this questionnaire will impact how sponsors feel about it. If you are looking at a lot of opportunities and for each one you blindly hand out this questionnaire, you might find yourself becoming quietly removed from some sponsor’s mailing lists.This might be no loss for you in some cases, as the sponsors who are unable or unwilling to answer the questions aren’t the ones you want to invest with anyways.But there are sponsors out there that go to great lengths to anticipate investor’s questions and spend many hours to produce some fairly thorough offering materials that answer most, if not all, of these questions.So rather than passing out this questionnaire to every sponsor you meet, consider using it as an internal checklist of sorts. Carefully review the sponsor’s offering materials and note on your questionnaire the answers that you find. Then, submit the remaining unanswered questions (and anything you didn’t understand from the sponsor’s materials) as your “questionnaire.” This gives you the added benefit of ensuring that you really read those all-important documents. :)Be sure to give bonus points to the sponsors that answer the most questions without you even asking...that should be a good indicator that this isn’t their first rodeo.

Mike Dymski · Answer

Great checklist. Put it in priority order, complete it with the offering materials, if you hit an item or items that fail your criteria, stop, put your notes in a contact manager tool (like Podio), and move on to the next one...or, if it passes criteria, jump on the phone with the sponsor and ask the remaining questions. Analyzing every opportunity fully would take forever and is not scaleable.

Duke Giordano · Answer

Thank you so much for all of your thoughtful responses, I truly appreciate it. I agree @Brian Burke, if I blindly sent to sponsor I could see how that would become annoying. I am using it as you suggested to really compile the information I look for in deals and to be able to decipher between many deals that on the surface these days look so similar (everyone nearly has the same pref, IRR, equity multiple etc). Unfortunately, many of the deals I see leave out many of the answers to these questions in the PPM, in particular the GP fee structure.In addition, i left some variables out but I also look at a few other variable of the geographic location that i do not ask the sponsor about and just do my own due diligence such as population growth within a 5 mile radius, average annual income, job growth, and local employers etc. Being a quantitative geek, I then assign points and create a score for each of these categories based on responses of the objective categories previously outlined above to come up with an overall score for the deal by adding the scores up. (mind you this scoring system i created is subjective to whats currently important to me at this phase/point in the cycle, based on objective data). Having a questionnaire sheet that gives me all this info without having to search every line in the PPM can be helpful to tabulate these things quickly, even though i certainly look at the PPM in detail. Lastly, I take into consideration the most important variable being the sponsor themselves and the "gut" feel i get from them and that is by far the most weight of them all.Once again thanks so much for all your responses and dialogue.

Duke Giordano · Answer

Good point on the "Property Mgmt Co" and whether it is in house or farmed out.

Roni E. · Answer

The PPM and offering doc should answer all your questions. There are some investors they like listen answer these following questions and I will do go forward from there. The sponsor should answer all your questions with ease and get on a call. Now after a time an Investor might have built a large investor database and will try to streamline things. That is why an Investor Portal is great and monthly updates with financials are Great. We are a big believer in the monthly books and monthly distributions. I worry sometimes folks that are paying attention or reviewing things on a quarter is behind the curve in an Amazon culture of I need it now. I think also you need to think of this as a marriage, business marriage. You want to be connected with someone who respects your time and gets you answers, vice versa.A Sponsor in our opinion has 2 customers. a)The Tenant they need to be taken care of so they are happy, stay, and pay rent. b)Investors, get questions answered, kept up to date, and receive distributions inline with the business plan so they are happy, invest, and hopefully come back again.

Ronan Donnelly · Answer

Duke Giordano · Answer

Now that we have a rough idea on some of the important points/variables, I would like to ask a FU question. For those interested in investing in a syndication as a LP, what are the 5-10 most important variables "In Order" you look at in these deals?I know #1 by far is the Sponsor, and I think we would all answer that way. However, I am curious how you all would rank the more objective variables:I think mine might be as follows:1. Number of full cycle deals?2. Prior performance of IRR/Equity Multiple etc vs Pro Forma.3. Crime rate at location4. Job growth at location5. Fee Structure (Acquisition, Asset Mgmt, etc)6. Return Structure (Pref, LP Split, if a Waterfall)7. Reversion/Exit Cap8. Loan Terms (I/O, Bridge etc)9. LTV ( Loan to Value)10. Rent Increase Per unit vs Comps

Duke Giordano · Answer

Thanks for all your responses, it is certainly helpful. I do find some sponsor are willing to answer, others refer me to the PPM, Webinar.

Spencer Gray · Answer

I also think it's a great list, however I think most sponsors should be able to present this kind of information in a FAQ or firm overview PDF. The deal specific questions should be laid out in the deal pitch deck itself as fees and terms can change. We've put together a firm over doc for just this purpose that answers most of these questions so that before we have our first discovery call, or even follow up email, we send an overview that outlines what we do, track record, how our deals are typically structured, case studies, etc in addition to a current or past deal as an example. That way on the call we can get into specifics and talk more about the LPs strategy, goals, etc to see if we're a right fit.

Yannik Cudjoe-Virgil · Answer

I agree with these guys. Great checklist to use when evaluating a deal. A sponsor should be willing to answer the remaining questions. Prioritize the questions that align with your investment values and see if things check out in the sponsor's OM.