Here's a starting point for your consideration. It's a WIP Checklist with my latest thinking:
And, FWIW, I think that we are almost at "go time" in the syndication world. Asset values are cratering. I'm in one deal that lost almost 40% of it's value. Luckily, only have a tiny portion of my wealth in deals that started prior to 2023. I will probably lose everything on those.I think that by summer, we could be seeing one of the greatest buying opportunities in this asset class in US history.
"Good" For the Sponsor:
- Sponsor has been in business a long time, or is making a logical, short, next step with this fund, or continuing work on bread and butter. I.E. sponsor has been doing $50M apartment complexes, and is taking on a $65M property, sponsor is not starting a $150M fund after being in business for 1 year.
- This deal and/or fund is their full-time job. The person raising the funds is working on the deal, or a small subset of deals, full-time, and has no other businesses that will take up any material portion of their time. They intend to be on-site working in and on the asset(s) weekly (ideally daily).
- Sponsor has substantial experience in target market, and target asset class. This is not their first venture into Atlanta, when they have spent their whole career in Boston.
- Sponsor is transparent about current project performance. They do not tout returns from deals sold in 2019/2020. They are proud of the way they are currently operating in this environment (or better yet, that they avoided the current environment altogether) and are happy to disclose that they are only 5-10% off their NOI targets, compared to peers who aren't even in the ballpark, and have issued no capital calls or distribution pauses. If they are having problems, like recent capital calls, they are disclosing them upfront, and talking about how they intend to make current investors whole, while also pursuing the opportunity that current pricing presents.
- The sponsor is putting in a material amount of equity alongside LPs and are open and upfront about the amount. They are transparent about their fees. They have the possibility of materially losing alongside LPs, in addition to the upside they are working to earn. Their guaranteed fees from acquisition, management, and disposition do not dwarf their co-invest, though they may (rightfully so) win big with carried interest if the deal works out. While not realistic, "perfect" in my world amounts to the sponsor and their team earning modest salaries during the hold period, and having big upside if the deal works out and LP capital is returned with a pref.
"Good" from the Deal:
- Market / Strategy Make Sense: In a growth market, there is a value add plan and reasonable assumptions around rent growth. In a cash flow market, there is a discount to going cap rates, and a heavy value-add / repositioning plan to reduce costs.
- Value add plan makes sense at the highest level: A property with dated units, but an investment plan to repave the parking lot, does not solve the problem.
- Recent Comps for cap rate: Sponsor provides clear example of comps sold in last 90 days to determine cap rate, and does this for each asset being contemplated. If a new fund, without a deal identified, sponsor shows recently sold deals they would have bought had the fund been in existence in the preceding 90 days.
- Projection model has reasonable conservative assumptions:
1) I don't want to hear about a base case where the sponsor thinks they are going to buy the asset at a 6/5 cap and then sell it in 3-5 years at a 5/4 cap. Not going to happen, unless they have a massive repositioning project that fundamentally changes the type of renter it attracts.
2) Rent growth is reasonable, and sponsor does not just talk about inbound migration, income, and growth in the market, but also talks about supply coming online in their market as a threat to rent increases, and how they think about the balance.
- No Complex Equity Tiers: Deal has a single, or maybe two, class(es) of investable equity and no complicated tiering program for larger investors. High minimums are fine.
- Leverage Terms are clear and reasonable: I'm personally not interested in deals with more than 60/40 debt to equity ratios (not that most sponsors can get much beyond that in today's environment. Longer amortizations, balloons, lower rates, and fixed interest rates all de-risk the project, but it's case by case. Sponsor is clear about who is guaranteeing the debt, and if that person has special investor treatment.
A couple of other items:
- I'm staying away from "preferred equity" - I am not interested in being a second position lender on any real estate assets right now. I might be interested at rates north of 15% at light leverage ratios.
- I'm staying away from the markets with the most construction going on, including large parts of Texas, Florida, and the West, including my hometown of Denver.
