All Forum Posts by: Bobby Larsen

It's unfortunate that so many have been burned by this down market. I would just say that in the future, put more emphasis on sponsors and strategy. I, too, wish there were more regulation in the private placement space when it comes to sponsors and reporting. With a good sponsor, you won't even have to review each deal. You'll just know the box that they invest in and each deal will fit the parameters that they focus on. 

Second, make sure you understand the product quality that you're investing in. REITs invest in Core and Core Plus assets with low leverage and these previous comments are speaking mostly about sponsors that were focused on highly leveraged 1970s and 1980s value add. It's an apples and oranges comparison. If you like the stability and lower returns of REITs, find a sponsor that also invests in Core and Core Plus properties. They're out there and they will still beat the returns of REITs. I know many great sponsors that have never lost a dollar of investor capital.

Third, to @Amit M.'s point, understand the alignment of interest created by compensation. Too much back end compensation will lead to risk taking. Too much upfront and non-performance based recurring comp and there's no incentive to perform well (ie REITs). 

Fourth, avoid the new age internet marketing sponsors promising the highest returns. As with ANY investment, higher returns typically come with higher risks. There are many great sponsors out there (happy to provide a few) that have a long track records, have never lost a property, and know when to dial up or back leverage/purchases while still being able to provide 20-30% annual returns over the past 20 years and multiple cycles.

REITs are a great investment but primarily due to liquidity. The other concerns that you have voiced are very much valid but they can be mitigated with the right sponsor.

@Carlos Ptriawan

We’re talking about different levels of experience. A 2010-2020 track record has zero experience in a recession or a down market. And sure, you can find outliers but at the end of the day REITs are totally different investments and more correlated to equities than they are real estate. Over the past 24 years, REITs have averaged a 10.9% return while a private placement strategy utilizing longer term fixed rate debt would have averaged 20% to 30%.

The problem is the sponsor/strategy selection, not investment vehicle. LPs should stop chasing the high leverage, short flip sponsors.

Experience matters 100% in syndications. There’s a reason why many sponsors have never given back a property to a lender or lost a dollar of investor capital. Sure market risk is real but that’s where experience comes into play. Everyone can make money in an up market but through experience, sponsors can mitigate risk in a downmarket and still provide reasonable returns.

Way too many variables here. A “heavy turn” can easily cost $5,000 but a partial renovation can be anywhere from $7,000 to $20,000 per unit depending on the market and unit size/layout. I would say that most standard renovations on typically sized flat units is $12,000 to $15,000.

Most syndicators, strongly correlated to those with a large online presence, acted with inexperience and made unwise purchases in 2021 and 2022. Capital calls and pausing distributions across portfolios is entirely avoidable but somewhere in 2021 this industry started being flooded with inexperienced sponsors and LPs expecting to get rich quick.

Not applicable to all but the pause in distributions is just the start of it for many large 2021-2022 portfolios.

@Sean O'Dowd

This is soecific to Delaware LPs but they tend to be the most common:

(a) Each limited partner has the right, subject to such reasonable standards (including standards governing what information and documents are to be furnished, at what time and location and at whose expense) as may be set forth in the partnership agreement or otherwise established by the general partners, to obtain from the general partners from time to time upon reasonable demand for any purpose reasonably related to the limited partner's interest as a limited partner:

(3) A current list of the name and last known business, residence or mailing address of each partner;

https://corporate.findlaw.com/corporate-governance/the-rights-of-limited-partners-and-members-to-obtain-information.html

@Irina Seals

Request the list of LP investors from the sponsor. They should be required to provide upon written notice and whatever the path forward is, it’s most likely worth pursuing collectively.

@Alexander Rovsek depends on the size of your property. All of our large properties advertise on apartments.com and Zillow and they drive good traffic but they’re expensive. If a property doesn’t have more than at least ~30 units, probably not worth the expense.

32x return over 10 years? That would be an immediate red flag if I saw that. Best to avoid anyone trying to push those type of return projections. Is it possible? Sure. But is it likely over a full 10 year period? No.

Number 1 qualifier when investing with an operator is trust and outlandish projections is a quick way to lose my trust. When it comes to real estate, conservative investors win in the long run because they never put themselves in a position to lose equity.

3-mile and 5-mile development pipeline is 14.2% and 16%, respectively. Although, most of the pipeline is in the planned and perspective categories, and not under construction so there's a larger degree uncertainty that those will be built. Occupancy looks a little weak with most of the market rate properties in that area operating around 90%. No real way to quantify the potential distress but purchases made during 2021-2022 frequently used debt funds in Jacksonville and majority of those will/are experiencing issues.