All Forum Posts by: John Sayers

     "What comes out better between the two options below?"
Maybe a bit hard to say "better" unless one knows more on risk tolerances, dev plans, goals, etc.

Some stores may be open to a NNN lease depending on dev plans.
A lease "can" possibly have more liquidity/exit options for you in the future vs getting a "partner" to agree to sell later. It can have various ways to slice/dice who pays for what. I'd suggest considering hiring a CRE pro in structuring the deal and laying out options. Odds are they will pay for themselves.

Mr  @Brian Burke with the succinct reality line!

    [Eventually someone is going to lose this bet. The ten million dollar question is, "when?"].

Indeed! Hedging bets and building in risk mitigating plans/processes can generally get one through a rough patch or two.

If a deal can't weather an average storm, maybe one should not set sail on that type deal. Or at least not too far from shore. (quick turn etc.) If a deal can weather a storm, then maybe be sure the captain has knowledge & skill on navigating the major hazards without critical losses.

Risk assessing and risk mitigation can work together to help make the seemingly impossible, possible; less risky anyway. Note: skills that are careers by themselves. Defining acceptable risk parameters is part art, part science and part goals/mission. It is hard to say what is a good or bad time, or deal, price, rate, or plan outside of some generalities.

For sure Mr Burke nailed it; people are going to lose bets. A normal thing, though less seen in the past error-forgiving tides. The first generally will be the ones sailing the historically calm rising tides thinking they are way more skilled than lucky. 

Acquisition fees and disposition fees do cover expenses/time etc. They generally cover that expense group and have excess fee funds left over for some GP/syndicator profits.

One fee profits on day 1 and the other profits on sale. Both generally occur before any LP receives profits on the funds that the fee % is calculated against. Some charge both fee types, some charge one fee and some charge neither. A few also scale and/or cap the fee with asset size. All have varying views on how one flavor is more "aligned" with the LP investors. There is a flavor for all investor types for sure. Generally, one's point-of-view bias will partly dictate which seems better for which party, which seems better aligned etc. That however is another topic... quasi-taboo for some.

The said fees in general, being a percentage, technically should scale back some for the larger assets, and a higher % for smaller assets; if they are said to be for cost/time recovery. 2% of $100 Million is quite different that 2% of $10 Million. All the key/basic steps are roughly the same, give or take; the larger deal acquires an extra $1.5-1.8 Million GP income before the LP can profit on that set of funds. Of course larger deals will have some expenses and costs that are higher due to the size; generally not $1.8Million more in cost, but it would be more than a smaller deal. On a much smaller deal, 2% acquisition may barely cover costs/efforts and likely 2.5%, 3% etc. is needed. Ultimately the numbers show the full picture.

Percentages are magical and powerful things for all involved.

Interesting one. I was curious what the industry pros would say.

Quote from @Zackarias Aitchison:

Hey!

If I'm investing out of state, or somewhere I've never been in person before,

Is there some way to figure out if I'm buying in a good or bad part of the city?

I could check google street view, but is there a way I could quantify this in some sort of way to be able to compare apples to apples?

I'm curious to see what some of the solutions are!

Cheers,

 Some very good one noted already. There are quite a few depending on if free or not etc. 

A couple more that may help a little.

AreaVibes:
Likely have to scroll and select Crime. Some locations have a crime map and some have the crime rankings. Many have ratings on Livability, Amenities, Cost of Living, Employment, Housing, Schools
https://www.areavibes.com/atla...

NeighborhoodScout
Has maps by cost, by appreciation, demographics, crime, Schools
https://www.neighborhoodscout....

Quote from @Andrew Hogan:

Now would be a good time to mention that this is just one of the reasons why you never underwrite/assume the "everything goes right scenario!"

Leave cushion in the assumptions for some wiggle room e.g.:
-rate hikes

-vacancy

-bad debt

-rising cap rates

-less favorable loan terms

-refi vs no refi

-5 yr exit vs 10 yr exit

Just to name a few :) 

Indeed. So many don't seem to really shock test the various risk factors in tandem when they make assumptions of trends. When I see (seems a bit rare) a sensitivity analysis produced, it is usually on one factor, maybe two. To me, they generally are not as sophisticated as they really should be.

Thanks you for sharing!
One thing I wish all summary docs had were a bit more of the assumptions buried in the  "Projected returns" and "Detailed numbers and analyses".

For example it does not take much space (1 or 2 lines) to enumerate items like the annual % for rent rate bump (for each yr), the economic vacancy % for each year, or the fee % AND dollar amounts in the tables, or table footnote. Some do this quite clear in the summary. The more complete the summary picture is the more likely one can validate and move onward with a decision. Some sponsors do a great job of briefly/succinctly laying out various assumptions in the summary.

To elaborate slightly on just one of them: on the rent bump, some pro-formas have a massive rent bump in year one that can sometimes seem camouflaged in the totals so you have to manually calculate what % deltas they are really projecting. Some are actually conservative, some are market and some are aggressive. For newer investors: unless all leases were M-to-M, and all were raised on day 1 the numbers that some sponsors put in Y1 totals (vs T3/T12) can occasionally raise an eyebrow.

I align with Evan on "operator" and I see your point on clarity.

Conceptually it is vague and intentionally misused by some syndicators who try to represent themselves as hands-on operators, but yet they don't source/secure deals nor asset manage them. They do syndicate them and may give some general GP input to theoretically stay legal. They tend to use "we" this and "we" that, but it's not a deal they themselves acquired, negotiated nor will directly manage. They mainly signon to raise $ on deals they like, which is fine and useful. The "we" thing however is a bad practice and can lack full upfront transparency which helps to fuel the confusion.

I tend to think of syndication/syndicator in the legal SEC sense and would still need to ask some of them if they are also the operator and asset manager/decision maker.

Some syndicators of course are 100% clear on their role and are much appreciated for the variety of options and insight they bring to the table via their connections.

Whisky vs bourbon in some sense. Almost everyone is a syndicator these days, not all are operators.

"sponsor" I tend to think of as generally anyone in the GP but the role could be anything, everything or 1 thing like signing the loan.

In the end, I always what to know who the  "day-to-day" asset manager and decision maker is. Shot caller. I tend to think of them as the operator.  Regardless, who really runs the day-to-day is maybe the thing to know for sure since terms are used loosely, interchangeable and even maybe incorrectly; myself included.

@Paul Moore notes an item overlooked by some.  "Let's just look at the acquisition fee and the liquidation fee and let's round those 4% total. That doesn't seem horrible until you look at what it really cost you as the equity investor: assuming a constant loan to value ratio of 70%, the cost to you is about 13% of your equity. That is 4% / (1 minus LTV (0.7)) = 13%+. And the syndicator will get that whether they perform well or horribly, assuming they don't lose it back to the bank of course.

So I ask everyone… Does this seem like a high fee to you now? Would you pay 13% to your stock broker to enter and exit a trade?"

+1 on that. 

Some deals can be setup with potentially disparate comprehensive risk to LP vs GP. The facts are somewhere in the PPM, OA, SA docs written by a legal team whose job is to first protect the GP interest. Read them closely. Sadly some only read them when the tide goes out and boats are already grounded.

Try to find out how much income a teacher makes is from education vs investing. Are they using students to find them almost all the deals or are they doing it themselves?

Some educators put out content and $$$ courses solely to grow their network of potential future investors. Neither good nor bad, and a fair tactic in general. Some are honest about it and others kinda dance around it and profess to be doing it all because so many asked, and they are so very nice.

New investors get molded as student/partners or at least as passive investors with a bit more knowledge than average. A new pool of passive rookie investors to potentially draw on from either way. A few may prohibit student/teacher partnering or investing, for a period of time. Others will promote it as a learning path. As always, buyer beware. Get trusted referrals if you can. Some will promote guruX but they are invested there and do not reveal it up front.

Also digest books carefully. Some are written to educate future investors and have very good general content.Thing is, they are also mostly written by the GP to educate the LP on the "norms", standards etc. Potential conflict of interest when it comes to teaching deal structures, fee types, loan risks, equity splits etc.