All Forum Posts by: Bryan Hancock

Keep in mind that a lot depends on the size of the project too.  Absent that I think it is hard to comment in the abstract, but the responses you've received above seem to be in line with what I have seen as well.  

Also keep in mind that the size and leverage component of your equity position on your balance sheet should drive your perception of risk relative to the size of the note you're being asked to kiss.  If the co-sponsor just needs a kicker they're probably less likely to value the guarantee as much as if they really need the guarantee to get the deal done.  

Who do you recommend for negotiating entitlements for a PID while we sell a piece of property in Manor?  The land use attorneys we would normally use are conflicted out of helping since they're Forestar clients.  

The attorney should be in Texas, but need-not be in Austin.  

Our crowdfunding team is seeking software developers with real estate experience who are interested in helping our company grow and scale.  If you're interested in the opportunity please email me at the address in my signature line.  

I “own” all of the Fortune 500 companies by virtue of my small index fund investment.

I'm starting a blog series and thought I would put this out for commentary before I publish it more formally.  Thoughts/feedback are appreciated.  

“Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron's cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience. They may be more likely to go to Heaven yet at the same time likelier to make a Hell of earth. This very kindness stings with intolerable insult. To be "cured" against one's will and cured of states which we may not regard as disease is to be put on a level of those who have not yet reached the age of reason or those who never will; to be classed with infants, imbeciles, and domestic animals.”

~C.S. Lewis

The older I get and the more experiences that have shaped my being the more I have grown to understand that value judgement is necessarily rooted in both tradition and some deep narrative and the individuation of those charged with providing benevolent constraints masquerading and protection from one’s ignorance. The irony of the investment strategy of the average American – including those who meet the definition of an accredited investor – is that the bias toward optimizing for the downstroke and safety robs one from the benefits of individual growth and setting the stage for their future self. Having guardrails against the hubris is arguably noble, but the freedom versus safety infinite game can easily be framed in a manner to make the pursuit of safety the villain instead of the other way around.

The parallels of the current COVID conversation and vehement disagreement juxtaposed with long-ago litigated debates of freedom and safety in the financial realm are stark. Ironically over the last 10 years with the benefit of time and hard-fought wins in the legal framework we have given individuals choice back. This choice and the freedoms it affords optimize for liberty while arguably stabilizing the system for the collective. Which should rule the roost? That, my dear reader, depends a lot on your point of view and your individual circumstances. Who is one to say that their unique point of view is optimal? Optimal in what sense? A one-size-fits-all approach to defining the rules is extraordinarily difficult in the same way that writing down all of the laws in Napoleonic fashion is virtually impossible. Judgement in the name of prudent decisions with regard to complicated problems is needed.

Is it worth it to seek those extra few points of yield? To properly assess the proper path for one’s portfolio one must do so with a backdrop of accounting for the individuals’ skill in selecting sponsors, accounting for margin of safety in financial modeling, and an understanding of how much “risk capital” the induvial is allocating to the selected opportunity. By definition this risk capital is seeking a higher risk/return dispersion and thus the instrument in current law that limits how much one can invest with certain exemptions is prudent. How, pray-tell, would a rational person assess the capacity for one to make judgements about the skill of sponsors or how conservatively their opportunities are underwritten? The proxy for this in the current narrative are Series examinations, but these exams are largely biased toward industries serving markets with much smaller risk/return dispersions. This prescription seems tone deaf at best.

So how does one serve the interests of the collective sufficiently while allowing for exceptions without introducing bias that robs the individual of their liberty? The blunt instrument of using one’s net worth seems woefully inadequate and is designed to serve the bureaucrats providing oversight. What is a useful substitute that accounts for skill in this conversation?

I skimmed the thread and didn't read every response.  The ones with a lot of votes seemed like good responses.

This is another installment of holy war threads on BiggerPockets so I won't attempt to convince anyone that their perspective and unique circumstances are incorrect.  What I wanted to comment on though is that risk and return are inextricably linked.  You CAN'T achieve 30%+ returns consistently without bearing more risk.  If you could hedge fund managers would quickly outcompete your capital with large swaths of capital.  

Underwriting sponsors and their opportunities can easily be a full time job if it is done properly.  If you do decide to invest with what seems like a trustworthy sponsor the best way to do so is to start with a small amount of capital, observe performance, reporting, etc. and then increase your contribution on the next deal.  Ideally this would be done after doing proper diligence and making sure that the sponsor's skill and expertise matches the opportunity being presented.  

What you'll find is that the better sponsors are likely to have a lower return to LPs because they present less risk and are rightfully keeping more of the profits for themselves. The game as a LP is to find a good risk-adjusted opportunity that fits with your tolerance and matches the suitability for your portfolio. The kicker is that as the sponsor matures they're going to offer less to LPs and you may have to find a new sponsor if your goal truly is to achieve 30%+ returns (IRR, MIRR, or pick your measure) annually. Just make sure you impute the 0% returns you get while the capital sits idly waiting for a new project and the value of your time in underwriting that could have been used on something else.

There ain't no such thing as a free lunch.  Whether or not a passive investment in a private opportunity works for you depends on many things.  Don't be fooled by the sirens calling you and also don't be scared of your own shadow.  Try to dispassionately evaluate every opportunity with a goal of maximizing after-tax returns net of risk in line with your own goals and tolerances.  

Not possible is an overstatement. You simply have to be willing to either pay the premium to get a portfolio loan instead of a conventional loan. Alternatively you can violate the alienation clause in the loan after refinancing it in your name and back to the LLC. This, in effect, makes the loan callable by the lender. It is unlikely that the servicing company will call the loan if it is performing and they're probably not going to monitor the utility bills to make sure they're issued to the right entity on the original loan documents. Just know that there is a small risk that the loan may be called at some point in the future. This risk is very small, but it is non-zero.

I would personally favor marking the value to the market, but by definition I don't think there will be a market for what you're offering so valuation at your investment amount is probably prudent.  That is, unless the investment should clearly be discounted because it is impaired somehow in a situation where the deal is going sideways or south.  

The PFS I have has a Section 5 for real estate.  I understand these are private securities, but that is probably where a lender would want to see things listed if they're using it for a lending decision.  You can disclose around what the investment is in the narrative to the lender or with some notes in the PFS.  

I am interested in what you find for larger tracts to develop.

I think the answer is that it depends.  Multifamily syndicated securities offerings can be structured many ways so whether or not a lender would view your securities as valuable would depend on the duration of the debt instrument they're using the collateral for, whether or not a secondary market exists to exchange said collateral for cash, how marketable the securities would be without a secondary market given how the offering is structured, etc.  

Most multifamily syndications utilize Reg. D and thus by definition the shares are designed to not be freely transferrable.  I suppose the lender could utilize dutch auction provisions or whatever is specified in the agreements to liquidate the shares or ask the sponsor to make a market with the shares, but what incentive does the sponsor really have to do this to convince a lender to accept the illiquid collateral as valuable for your loan?  

This is part of what you're signing up for when you invest passively in a syndication.  People on this site love to laud the benefits of such investments, but there simply is no such thing as a free lunch in finance.  What you get in upside on your investment you pay for in a lack of liquidity, heightened risk, or in some other manner by seeking yields with less experienced sponsors, riskier assets with higher dispersions of return, etc.  If this was not the case capital would flood in from sources with much more capital than the typical individual accredited investor can manage to scrape together.  

If the desire it to leverage your cash you'd be better-served to seek a debt instrument (loan or other) of some sort prior to investing in the syndication and then to invest those dollars instead mindful that this should be a disclosure item to your sponsor.  The degree to which this makes sense depends on how suitable the investment is for your overall portfolio and what role the risk capital is playing in your overall plan.  A lot also depends on how active you desire to be and if you're mixing in entrepreneurial labor with your cash.