All Forum Posts by: Ariel Gonzalez

 I'd say past successes will be the best criteria to look for. I have seen development syndications that go years without even breaking ground. So, I'd caution against inexperienced syndicators. Additionally, I'd even expect deviations from business plans with experienced syndicators. Construction/rehabilitation timelines rarely go as initially indicated. 

Ariel, When vetting a syndication, every investor will do it differently because every investor has a different risk tolerance, comes from a different financial situation and has different financial goals. So a deal that look great to one investor will look horrible to another and vice versa.

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. 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.

@Ariel Gonzalez

I would like to know how much capital, AKA, skin in the game they have. I Would like to know what their NOI growth has been the past five years. Many investors have sold deals in the past market cycle, and mad money purely through cap rate compression.

I would like to know how many deals they have gone full cycle.

I want a list of their team members, including CPA, Securities Attorney, Property Management company, and all the general partners on the deal.

LPs need to focus on their goals, and make sure their interests align with the sponsor.

Hope that helps

Gino

The good news is that it's going to be a lot easier to vet a quality GP in the next few years than it has been in the past.  Experience is key for sure - but there is also the reality of LPs needing to allocate capital and the number of experienced operators available to invest with will likely be smaller than the LPs who want to invest.  As @Evan Polaski said there are different kinds of experience and we will be going into a cycle where any operator who has been around longer than five years will have experience in a tough market.  My "experience" evaluation will take into account how they made it through the markets from 2019 to 2025 - that will tell you a lot.

I will be looking at how the operator handled their deals during this time, how they communicated during this time and what they learned.  Prior to 2022, it was difficult to find an operator who didn't make a lot of money on their real estate syndications.  At the same time, there just weren't that many operators serving LPs who had been doing this long enough to have gone through turbulent markets.  The 2012 Jobs Act is what made syndication investing more accessible so it was smooth sailing in this industry for a decade.  Now it's not - - cue the Warren Buffet quote about when the tide goes out you see who is swimming naked.  

The key for me will be to evaluate how they came through these difficult times.  Did they stop distributions or have a capital call?  These will not be disqualifying for me - I will want to understand it in context.  There is a difference between an operator who did not communicate any problems until the email about the capital went out and the operator who was constantly updating investors on the asset and the difficulties and challenges and preparing investors for the possibility of a capital call prior to actually going through with a capital call.

I think the biggest lesson I have learned as an LP over the past few years is that I will absolutely require consistent, thorough and realistic communication from any operator I invest with.  My due diligence will include reviewing past reports - on assets that performed and those that didn't.  I have always put communication as one of the top criteria for operators, but I also excused those who were poor communicators but had "good" deals.  I am paying for that now.

I will also do all of the other due diligence prior to investing - experience of the operator, referrals from those in my Community and network who have invested with the operator, responsiveness and other factors - but proof of effective communication will remain a priority for me.  I will also remember to be patient - it's ok to invest the minimum and wait a year or two before getting into a deal with the same operator.  Patience would have avoided a lot of the current pain.

Syndication investments are long-term, illiquid investments completely out of your control.  If you don't choose an operator who will effectively and honestly communicate with you, then you will be a frustrated, and likely poorer investor.

We have a housing shortage. Milwaukee makes the top 5 in rent growth in every statistic I have seen this year. Take a look at the data from rentcafe. We have raised older leases 5% this year which is below market. We just listed a single family for $2,450 two days ago, which is pretty high for us and no shortage of applications.

@Ariel Gonzalez, I will also note that while there is a lot of very sound advice being presented here, including my own comments, none of this is actually measurable.  

As I note, track record.  Is 10yrs adequate?  Is 15?  Does it need to be 30?  Each investor will be different, but I don't think anyone will argue that more experience is WORSE than less.

Same with Conservative Underwriting.  This topic is always brought up on these forums and touted by syndicators.  But no one with half a brain would ever market themselves as "and we get very aggressive with our underwriting".  But what is conservative underwriting?  Is buying at a 5% cap rate today conservative, or is it an 8% cap rate?  If the 5 cap deal was an office tower in Hudson Yards, Manhattan is that better than an 8% cap rate on a 70's built multifamily in Class C area of DFW?  Is 4% rent growth conservative if CoStar is projecting 6% rent growth for that market for next 5 yrs?  2% would be more conservative, but who is to say one is right or wrong.

All of this comes back to what syndications really are: marketing.  You can market yourself and your deal as just about anything you want.  

"North Carolina has increasing supply, so rents are falling today.  Which is why it is a good time to buy.  Once the current glut of new supply is absorbed, there is nothing in the pipeline, creating a 3-5 yr window of lower competition.  So with population growth of 50,000/yr forecast to come in for the next 5 yrs, and only 70,000 new units being delivered, we are buying for a long-term hold based on the future fundamentals of the market.  Once the new supply is absorbed, and we are seeing rent growth again, which supply and demand is all but guaranteeing, not only will our project benefit from stronger rent growth, but also appreciation will accelerate as more buyers will come in helping drive up prices."

Alternatively, (and I don't know Milwaukee):

"Milwaukee is a great place to buy.  Population growth is remaining strong, and since this was not a "hot" market in the last run-up, there is limited new supply.  Being more affordable than the southeast, allows us to get in with a better basis and potential for growth as more people seek out affordable places to live with strong lifestyle amenities, and convenient travel available: major industries, all major sports, Delta Hub airport."

It really comes down to creating a message about you, your company, your deal that resonates with potential LPs and then spreading it widely.  

Track record, a strong deal, conservative underwriting, realistic returns, good debt terms. These are some of the things sophisticated LP's look for.