Quote from @Amy Lin:
Quote from @Ian Ippolito:
Quote from @Amy Lin:
Hi all,
We have came to know a syndication opportunity which is a 506B syndication deal of an 100+ doors apartment complex in Texas. We are not credited and mainly invest in SFRs. I have read so many posts on BP forum and tried to learn as much as I can about syndication this pass few days and it has been very helpful!
As for this deal, there are about 10 GPs and projected equity multipler is 2.3x, 5 year fixed rate with Fannie Mea at 5.6%, 3 year IO and 1-2% pre payment penalty. It's gonna be a value-add project of a C class property. Current occupancy rate is 94% and they stated that for us to make the mortage payments to break even, occupancy rate just need to be about 65%.
It appears that there are 6 GPs going to be doing assess management. I was wondering if that's the norm for the industry ? They said there is no single main operator, each 6 GPs have their own strengths and will be in charge of different parts of the operation. Also none of the primary GPs have finished a full-cycle with their other syndication.
Any advice for Newbie like us? We are looking to invest the minimum amount 50k.
Every investor has a different risk tolerance, financial situation and set of financial goals. So something that looks great to one will look terrible to another (and vice versa).
And I'm a conservative investor, so a more aggressive investor will look at things very differently than I do.
In my opinion: many newbies, who haven't looked at enough deals yet, find themselves in a situation where they "don't know what they don't know".
And it sounds like this is probably one of the first deals that you've looked at, since you asked if the 6 GP setup is normal. (It's not. It's extremely odd....and in my opinion adding unnecessary risk and ludicrous).
As a conservative investor, I personally want my sponsors to have full cycle experience with little to no money lost. Otherwise they're more likely to be learning expensive mistakes with my money (especially if a downturn hits). So for me, the lack of this, is an immediate dealbreaker and an easy "no". A different investor will feel differently.
Also, you didn't mention a lot of the basic data that most sophisticated investors would be looking at, when evaluating the potential risks of a new deal. That includes sponsor co-investment (and details), leverage (and details), fees and splits, etc. If you want more information on that, then let me know and I can share how I personally look at these items.
Thank you Ian. This is definitely the first ever deal we've looked at and I've learn quite a bit the past weeks reading on posts and analysis the deal. Coming to find out there is even more to learn haha.
I would love to get your scoope on how to look at the deal in more details. Thank you!
You're welcome Amy.
When vetting a syndication, different investors will do it differently... because every investor comes from a different financial situation and has different goals and risk tolerance. For me, I'm a very conservative investor and may look through a hundred deals a month, and at the end of the year only invest in 4-5. So things that are a red flag for me may be fine for someone who's more aggressive. Here's how I do my due diligence:
1) Portfolio matching: (takes 30 seconds per deal)
a) Have an educated opinion on where I think we are in the real estate cycles (financial and physical market cycles)
b) Then and only then do I pick the strategies, capital stack, and specialized asset subclasses that make sense for that opinion. For example, I am a little concerned about some aspects of the business cycle recovery and a potential for a double-dip so I lean toward the safest part of capital stack which is debt (or low-debt equity). I won't go with the riskiest opportunistic strategies, and will stick to core and core plus mostly with some value-added. I won't be investing in the riskiest/most supportable asset subclasses such as hotels, and tilt my portfolio the ones that have historically been more stable such as multifamily and single-family housing. I also don't want refinancing risk, so any deals with only 3 to 5 year debt are out for me. For someone that's not as conservative, or a different view on the cycle, they might have a different opinion than me on all of this.
2) Sponsor quality check: (takes about 45 minutes per deal)
I believe that a great sponsor can take an average looking deal and make it great, and that in mediocre sponsor can take a fantastic looking deal and make it bad (especially if there is a severe recession). So I start with the sponsor first. Again, others might disagree.
a) Track Record: Get the entire track record for the strategy. As easy as this sounds, it's not simple and usually like pulling teeth. Many times they will claim it's wonderful and then try to hide their worst deals by only showing completed deals. Make sure to get unexited deals. Or if they are doing value-added multifamily, they will show you their hotel experience. That doesn't cut it for me. I want a specialist that's an expert, and not a jack of all trades and master of none. Also, in a mainstream asset class like value-added multifamily, I see no reason to take a risk on a sponsor that doesn't have full real estate cycle experience or that lost anything more than a small amount of money (and prefer no money lost). Again, other might feel differently here.
b) Skin in the game: as a conservative investor, I understand that the dirty secret of industries that the waterfall compensation is in the line with me and incentivizes sponsors to take more risk. So I require skin in the game (average is 5% to 15%) to offset this. Contrary to popular belief, this is not set because I believe it will give me a higher return. I believe it tends to give me a slightly lower return, because the sponsor is going to be more careful, and if there is a severe downturn will prevent me from taking catastrophic losses. Someone that is more aggressive, may want lesser even though skin in the game. Also, if the sponsor is new, I am fine with less skin in the game as long as it is significant to their net worth. On the other hand if they are a sponsor that is experienced in stopping a skin in the game, that's a huge red flag for me.
c) how open to scrutiny are they? I always discuss investments with others in an investor club because other people might think of things that I might miss. And even though virtually every sponsor agreement allows me to share investment information with others who might be advising me on it (especially when club members are bound by an NDA), I still ask the sponsor if I can share it, because it's a test. Most are fine with that, but a few will have problems with it and claim there are legal issues, etc.. That's a red flag for me.
d) death by Google: I Google everything I can about the sponsor. I check the SEC, FINRA, ratings websites for inside information on the principals in the company. I also look for lawsuits and see what happened in them. Many times it's an easy red flag. Sometimes it's ambiguous, but even then, why should I bother with the company that has numerous unresolved lawsuits, versus another company that is virtually the same but has none. Again, others might feel differently here.
3) property level due diligence: (takes seconds to weeks per deal): here is where I drill in with the low-level details.
a) pro forma popping: I examine all the assumptions, and see if they are overoptimistic or not. I look at every single item in the pro forma and imagine that it is complete BS, and see if I can challenge it. If there's a hole, it may be a red flag.
b) sensitivity analysis: I examine all the assumptions, and make sure I can live with the worst case scenarios.
c) "Stall and see": if they are getting money over multiple years, and there is no penalty for investing later, I would usually wait so I get some real performance data, versus having to look at theoretical pro forma information.
d) Recession stress test: I will not invest in anything, until I subject it to recession level stress and see if I can live with the result. And I take the worst recession I can find in the recent past. Sometimes there is only great recession data, and that recession was pretty mild on some asset classes, versus previous recessions. So I will usually 1.5x or 2.0x the stress. If the deal collapses and I would lose everything, I'm out. Others might be fine with taking risk, but least by doing this a person can get an idea of what might go wrong.
e) Legal document analysis: it will usually take a few days to go through the legal document properly, as almost inevitably there are tons of gotchas that either have to be explained, or mitigated with a side letter.
That is the very short summary of what I do. If you want more information, p.m. me and I can give you a lot more details.
