New Industrial Syndication Investment, looks good to me?

Question

Came across this Deal from heritagegroupcapital.com, They are buying 2, 100k industrial fully tenanted/leased buildings in North East Indiana, near Fort Wayne. Sponsor is Jeff Greenberg, owner of Heritage Group Capital, 3rd generation CRE, at first did multi-family in New Jersey, now diversified. He is putting in 15% of equity as his family office as a TIC, tenant in common to the deal via a 1031 exchange, so that aligns him with LPs better than 99% of deals out there, also GP fees are fair to reasonable, 8% pref, then 80/20 and then for >14% IRR, they split 70/30, so better than 95% of last 100 deals I have seen. (I analyze syndication deals all the time, wife says I'm likely on some damn Spectrum :) I asked the first question on this week's webinar. They seem smart and straightforward. Min buy in is 50k, pays quarterly distribution. timeline 5-7 yrs, getting very good loan from insurance co source at 6.75% or so with interest only on yrs 1-3 then no defeasance penalties thereafter if they re-fi or sell. It is a very small investment, only 4.5 sticks, so should fill up fast. Industrial is a good place to be next 10 yrs IMO. watch recent webinar. What are your thoughts?

[NE Indy Industrial Portfolio (heritagegroupcapital.com)](https://heritagegroupcapital.com/ne-indy-industrial-portfolio/)

Scott Trench · Answer

This is one of the rare times I disagree with @Brian Burke.

Brian is a career GP. GPs do not like to put material portions of their net worth into deals. And do not like pressure from LPs like me who simply pass if they don't.

LPs do like it when GPs put material portions of their net worth into deals.

I've never met a GP who feels that they should have to put a meaningful co-invest and serious percentage of their own net worth into a deal.

I've never met an LP who feels that they shouldn't.

Data in this industry is the wild west. But, we will figure it out. And I bet that when all is said and done, LPs who invest with GPs who put real wealth into their own deals will do better on a risk-adjusted basis than those who invest with GPs who don't. Having real skin in the game is a major incentive to do the best thing for investors in a downside situation.

And, I just don't buy that GPs will liquidate the deal to finance their personal problems - if that's the case, then I invested with a GP who was irresponsible to risk their family's financial future on a single deal. I feel that the coinvest should be meaningful enough to cause real pain for the GP in the event of a bad outcome, but not so much pain that a bad outcome or 100% loss ruins them or threatens to disrupt their lifestyle either.

Paul Azad · Answer

The link above has most of those details, The fixed loan is from an insurance company, is interest only years 1/2/3, then no defeasance penalties up to year 10, they plan to sell/re-fi in 5-7yrs. There are 2 buildings, the first in Fort Wayne, near airport houses 1 tenant ZF, a german auto-parts supplier, been in the space x 22 yrs and only has 2-3 years left on lease but space is custom for them and they have long contracts from automakers for parts for legislatively mandated discontinued car parts, when car models get shut down, the manufacturers have to continue to supply parts for 10-15 years by law, and ZF gets many of these contracts, also all work force very established there so company less likely to move, but even if they do, Heritage could carve up the 1, 100k space into 4 smaller spaces and then get 50% more rent. (from $4 to $6 a sq/ft) The second building in north of Fort Wayne by 20-30 miles in Garret Indiana, with 100k and with four smaller tenants, including Vanderbilt Pontoon boat company, a bakery distributor, a home Leaf gutter supply place etc.

Heritage owns 1.1 million square feet of industrial in Indiana already so this 200k adds to their footprint, They have 10 million sq ft in office/multi-family and industrial in 20 states with >2 billion AUM. i clipped some of the financials and debt info below

and since you are the DSCR Master,

and

Carlos, I know that initial and rising DSCR is making you a little moist :)

Brian Burke · Answer

A career GP (who invests in my own deals), yes, but also an LP in private placements across a broad spectrum of industries, real estate included, so I see this issue from both perspectives.

I think we do agree that many GPs won't, don't, or can't invest in their own offerings, and I also think we agree that GP investment makes LPs feel better.

I think where we differ is that the existence or absence of this investment makes a tangible difference.  There isn't hard data, but there is plenty of anecdotal evidence, as this issue has been researched for decades.  I researched this heavily when writing a whole subchapter on this issue in The Hands-Off Investor because I didn't want to fill that book with just my own opinions.  Just a small sampling of what I found:

In 2011, Pensions & Investments wrote, "...investment strategies of some large real estate managers that had made sizable investments alongside their investors suffered some of the worst returns."

Pension Real Estate Association wrote in a 2013 whitepaper, "...co-investment capital does little to deter imprudent risk-taking.  Many of the real estate investment advisors who lost substantial amounts of their client's capital during the financial crisis were also the advisors ho posted substantial co-investment capital at the fund's inception."

The California State Teachers' Retirement System studied this and was quoted to say, "CalSTRS executives have not seen a relationship between co-investment and investment manager performance to 'any significant degree.'"

Institutional Real Estate Inc published an article stating, "...not seen any evidence that manager co-investment produces superior results.  I've asked a number of the major consultants and research people whether such evidence exists, and they all say, 'no!'"

But this is one of those polarizing issues where I'm unlikely to change any minds, so I'll leave it at this:  a co-investment, significant or otherwise, isn't going to make an incompetent sponsor competent, an inexperienced sponsor experienced, or a dishonest sponsor honest.  The mere presence of a large co-invest shouldn't be taken as a license to bypass all other due diligence on the sponsor, the asset, the business plan, the assumptions, and the deal structure.  Declining an investment only because of the absence of a sizable co-investment, even when all other aspects of the offering are exemplary, is an individual choice--right, wrong, or indifferent--it's the LP's money and it's the LP who should sleep well at night.

Brian Burke · Answer

I think if investors can come to terms with that, and make their investment decision based on facts that actually matter, they might avoid more trouble.  Bottom line—you either trust the sponsor (based on due diligence, facts, track record and evidence) or you do not.  As for the debt risk, that’s easy—find out what the debt structure is before you invest, and pass if you aren’t comfortable.

Didn’t mean to drift the thread—so on to the OP…I reviewed the website but didn’t watch the webinar.  Fee structure can incentivize the right things or the wrong things.  Fee structure for this deal incentivizes the right things, that looks good to me.

Track record…I like that they’ve been in business for a while, but I’m not as comfortable with their history in industrial (maybe I didn’t dig deep enough). I like the market, Fort Wayne area has been a rent growth leader on the multifamily side for a while, not sure about industrial but a strong resi market means positive things must be happening there.

The reason this deal is a pass for me is I just can’t get comfortable with the vacancy risk.  There are only a few tenants and most of them have been there a short time. Some are newer businesses and some are described as “growing” (meaning to me, will they need more space at renewal and move?).  A vacancy might take a while to fill if it happens during an adverse phase of the cycle.  Maybe I’m just chicken little…

Carlos Ptriawan · Answer

Do you have appraisal opinion and comps ? What is the financing detail ? What is the exits assumption ?? Who is the tenant ?

Paul Azad · Answer

Thankyou Brian, good point. I suppose any sponsor/GP could sell property early if they needed capital back as they as GP have full control. My guess would be that as this GP is doing 1031 as a TIC into the deal he would be a little less likely to want a sale, which is a taxable capital event, and would like to keep his money invested and sheltered from taxation as long as possible which tends to fit with my investing style of long term/preferably forever investing.

I frustratingly see so many deal offers, particularly in Multi-Family space, where GP/sponsor is putting nothing or next to nothing into the equity portion and is collecting 2-3% acquisition fee/ 0.5-1% loan origination fee/ 1.5% yearly asset management fee/ 1-2% disposition fee and then 50/50 splits to 60/40 splits over fairly modest hurdle rates of like 14-15%, and it seems this latter structure incentivizes GP to take more risks particularly with debt options. It seems rather difficult to find GP - LP alignment today. :(

Brian Burke · Answer

The 15% sponsor investment does little to nothing to align your interests—especially in this case where they are a TIC to the syndicate.  Even if they were a LP alongside you the alignment is slim.

It could even misalign your interests.  Let’s say, for example, they needed that capital back for something else. That need could outweigh their desire to protect your best interests.

Not saying there investment here is a bad thing, per se, just raising this point so that this one element of the deal doesn’t tip the scale to you investing if you otherwise might not.

New Industrial Syndication Investment, looks good to me?

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