Quote from @Brian Burke:
Quote from @Steven Gesis:
Important takeaway is due diligence review, not only deal level but sponsor track record - yes, past performance is not indicative of future results, but at least it's a metric to review.
Agreed--but wait, there's more! One of the ways these operators got to the high IRR was to leverage the equity with a lot of debt and senior equity. So in addition to what Steven said about track record and due diligence, investors should pay close attention to how the capital is structured.
High LTVs, short maturities, mezzanine debt, outside preferred equity, and multiple share classes (the recently popular A/B equity structure) all increase risk. This wasn't taken seriously by many sponsors (who used these methods to attract capital as well as reduce the amount of capital they needed to raise) as well as investors (many of whom didn't understand the risks nor were they educated on these risks by the sponsor outside of a paragraph buried in a 100 page PPM).
Brian, I read an article in Bloomberg the whole premise of the business plan for a particular operator was a "double pop" and a short-term fix and flip strategy all focused on high velocity multiple refinance events, floating adjsutable rate and the hope and faith of continued rent growth coupled with low interest rates in multifamily - never even heard of a "double pop" suppose it can theoretically work, but the in-going cost basis has to be so low, the first lift has to happen so fast like almost within a few months- so the debt has to increase with it quickly, then followed by another lift and refinance in less than 30 monhts - I do not know sounds like a bomb! - personally at SMARTLAND as experienced heavy lift multifamily operators - it is a complex process and requires a team, time and skill - Yes, you can lift a property and value moderlty quickly if you have the right tools and process in place, no doubt, but you have to also have the correct financing tools in place and appropriate cost-basis to withstand turbulence along the way - (no straight path) - the short term mezz loans into this constricted/constrained lending environment is tough, even more tough with raising cap rates, market repricing = requires more time to season and continue to hold, unfortunatley as we have discuss to the max on this forum time was not on this operators side with the short term adjustable mezz loan -
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Pref Equity has entered many deals in the past 18 months advance of LP positions, also took a GP slice along the way ----
