How to evaluate a syndication

Question

For those of you that do syndicates, what criteria do you use to evaluate the offerings. For example here is one that I am considering off Crowdstreet- looks reasonable to me but this would be my first time doing it so curious what red flags to look out for. After i get my feet wet i will turn to MFH but i need to get my wife to ease into it...

any advice would be greatly appreciated

thanks all

any advice would be greatly appreciated

thanks all

Brian Alfaro · Answer

I agree with @Taylor L. Track record is something you definitely want to look into. The numbers being advertised are used as click-bait - focus on the property and the sponsors running it. You have to dig into the pro-forma and ask the lead sponsor questions to get a feel for their business plan. Right now some big questions would be:

-  Do those numbers include projected rent growth? If so, what year does the rent growth begin?

- Do those numbers include 6-12 months of PITI or OpEx reserves? A lot of lenders are requiring this right now due to COVID.

- Ask about the capital stack and the split. Is it 80/20, 70/30? Is there a preferred return so investors get paid first?

- What type of fees are the sponsors taking?

- How has the property performed during COVID? How was it performing prior to COVID?

The list of things to look for is long, but those are some good ones to start.

Taylor L. · Answer

There are a few guides that have been written that get into the details. To address your question about the returns, definitely don't just focus on the projected returns. Underwrite it for yourself and see how their assumptions impact the return. Seemingly small changes like stabilized rent growth rate can make a big difference on IRR, which is already kind of a tricky metric to have an intuitive feel for.

Additionally, one should in my opinion focus more on the team than the specific deal. Have they done this type of deal before? What's their track record?

Bryan Hancock · Answer

Underwriting syndications really can get quite complicated.  I'd try to get a feel for the margin of safety in the investment and what the sponsor considers the key risk factors to be, all of which should be outlined in their offering circular.  How are these risks accounted for in their financial models and what sensitivity analysis has been done to demonstrate how their margins of safety afford buffers needed?  How sensitive are the returns to these risk factors?

Aside from the modeling what is the sponsor's track record in this type of investment in this locale?  What is their track record overall and does this translate to this project with this set of partners?

Everyone can get rich in Excel so what you have to figure out is if the sponsor is trustworthy, has proper internal controls set up, and if their financial model passes scrutiny.  From there I'd recommend starting with small investments with the sponsor and considering upping your investment quantity on future investments as they demonstrate they're a good steward for your capital.

Josh Walker · Answer

It's been hit on already, but it can't be emphasized enough ... there is no such thing as a good deal with a bad sponsor.  Anyone can create a proforma that looks good.  The biggest part of any syndication is making sure that you are investing with a sponsor who is a good human being who knows what they are doing.  I have personally invested in just shy of 40 separate syndications and this advice would have helped tremendously early on.

There are definitely some numbers to pay attention to, a lot of which have already been mentioned.  I would find out if the sponsor plans to perform a cost segregation to take advantage of bonus depreciation as this can have a significant impact on your taxes.  I would make sure that the exit cap rate is not lower than the purchasing cap rate as this can artificially boost the projected returns.

I have a short document that I put together that covers a few things I've learned over time.  I love talking about sydications with those interested.  Shoot me a DM if you want to discuss more.

AJ Shepard · Answer

@James Lopes

Returns are just one way to evaluate a deal.  It’s more important to vet the operator in my opinion.  Have they been in the space a long time, does the project fit into what they have done in the past?  Is it something they can handle.  And of course digging into the numbers, mainly the assumptions.  You’ll want to make sure that timelines look right or reasonable, market rents are fairly accurate and that the cap rate on sale is above what they are buying it for.  Is it a development project and you’ll have to wait a year or two before gaining cash flow, or do returns start right away?

As far as the numbers you put out there, I’m sure there are operators on here that put out numbers very similar to that.  We look at already occupied buildings and value add projects which allow for cash flow at the onset of the purchase for the most part when the building is mostly occupied and just underperforming.  I’ve seen development projects take 1-2 years to start paying out and typically construction is the risky part of any development project.

Adriel Hsu · Answer

As others mentioned, really know the sponsors.  I've seen sponsors not perform when the deal was in a hot market in 2017 where it should have been an easy successful deal. Inversely, I've seen MANY sponsors that exceed projections. Like 70% return in a 1.5 year exit which obviously leads to crazy IRR numbers. Don't believe the projected numbers but look more into the market and the asset and sponsor.

Lane Kawaoka · Answer

You need to know the sponsor personally not the broker dealer in this case.

Next you need to know people that have invested with them in the past.

Then spot check assumptions like reversion Cap and rent increases projected... is it real?

Steve Morris · Answer

Well, my biggest issue is the word TARGETED.

This what they're hoping and praying for.  They have any real and today numbers to see if the targeted is obtainable?

Greg Moran · Answer

Im interested too! Looking at some commercial mixed-used developments in the DC area, and would love some insight into evaluating syndication deals.  Thanks!

How to evaluate a syndication

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