First Syndication deal, looking for second (and third) set of eyes
Member since 2023 · 5 posts · 1 vote
First Syndication deal, looking for second (and third) set of eyes
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Jonathan GreeneBusiness Member
Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votesDid you read The Hands-off Investor by @Brian Burke? That is a great primer for investing in syndications. Remember first that the operator is likely more important than the property. You are investing in an asset, but that asset is run by an operator. The operator's (GP) experience and track record is probably the most important part of the equation. What was their worst return? What return timeframe are you looking for? What is their information delivery system to LPs and how often? This should get you started.
10 Replies
- 3yLien VuongBusiness MemberReal Estate Agent · Boston, MA · Member since 2018 · 2k+ posts · 1k+ votes
Post the details here and we can take a look for you. If it is a true syndication, are they accredited? SEC filing? That's first and foremost in the due diligence (understanding their firm and past performance). The second would be analyzing the deal. Both very important and you need to pay close attention to them.
The Elle Group5154 Reviews - 3yJonathan GreeneBusiness MemberReal Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
Did you read The Hands-off Investor by @Brian Burke? That is a great primer for investing in syndications. Remember first that the operator is likely more important than the property. You are investing in an asset, but that asset is run by an operator. The operator's (GP) experience and track record is probably the most important part of the equation. What was their worst return? What return timeframe are you looking for? What is their information delivery system to LPs and how often? This should get you started.
- 3yIan IppolitoBusiness MemberInvestor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votesSam,
Quote from @Sam Magnant:
Hello there - I have an opportunity to invest in my first syndication deal for a multifamily in Boston, MA. I have read and studied syndications and analysis pretty deeply, but am looking for a second (and third... fourth...) set of eyes on the deal to see if there is anything I missed. What would you do if you were in my shoes?
For vetting a syndication, different investors do it differently because every investor comes from a different financial situation and has different goals and risk tolerance. For me, I'm a very conservative investor and may look through a hundred deals a month, and at the end of the year only invest in 4-5. So things that are a red flag for me may be fine for someone more aggressive. Here's how I do my due diligence:
1) Portfolio matching: (takes 30 seconds per deal)
a) Have an educated opinion on where I think we are in the real estate cycles (financial and physical market cycles)
b) Then and only then do I pick the strategies, capital stack, and specialized asset subclasses that make sense for that opinion. For example, I am a little concerned about some aspects of the business cycle recovery and a potential for a double-dip so I lean toward the safest part of capital stack which is debt (or low-debt equity). I won't go with the riskiest opportunistic strategies, and will stick to core and core plus mostly with some value-added. I won't be investing in the riskiest/most supportable asset subclasses such as hotels, and tilt my portfolio the ones that have historically been more stable such as multifamily and single-family housing. I also don't want refinancing risk, so any deals with only 3 to 5 year debt are out for me. For someone that's not as conservative, or a different view on the cycle, they might have a different opinion than me on all of this.
2) Sponsor quality check: (takes about 45 minutes per deal)
I believe that a great sponsor can take an average looking deal and make it great, and that in mediocre sponsor can take a fantastic looking deal and make it bad (especially if there is a severe recession). So I start with the sponsor first. Again, others might disagree.
a) Track Record: Get the entire track record for the strategy. As easy as this sounds, it's not simple and usually like pulling teeth. Many times they will claim it's wonderful and then try to hide their worst deals by only showing completed deals. Make sure to get unexited deals. Or if they are doing value-added multifamily, they will show you their hotel experience. That doesn't cut it for me. I want a specialist that's an expert, and not a jack of all trades and master of none. Also, in a mainstream asset class like value-added multifamily, I see no reason to take a risk on a sponsor that doesn't have full real estate cycle experience or that lost anything more than a small amount of money (and prefer no money lost). Again, other might feel differently here.
b) Skin in the game: as a conservative investor, I understand that the dirty secret of industries that the waterfall compensation is in the line with me and incentivizes sponsors to take more risk. So I require skin in the game (average is 5% to 15%) to offset this. Contrary to popular belief, this is not set because I believe it will give me a higher return. I believe it tends to give me a slightly lower return, because the sponsor is going to be more careful, and if there is a severe downturn will prevent me from taking catastrophic losses. Someone that is more aggressive, may want lesser even though skin in the game. Also, if the sponsor is new, I am fine with less skin in the game as long as it is significant to their net worth. On the other hand if they are a sponsor that is experienced in stopping a skin in the game, that's a huge red flag for me.
c) how open to scrutiny are they? I always discuss investments with others in an investor club because other people might think of things that I might miss. And even though virtually every sponsor agreement allows me to share investment information with others who might be advising me on it (especially when club members are bound by an NDA), I still ask the sponsor if I can share it, because it's a test. Most are fine with that, but a few will have problems with it and claim there are legal issues, etc.. That's a red flag for me.
d) death by Google: I Google everything I can about the sponsor. I check the SEC, FINRA, ratings websites for inside information on the principals in the company. I also look for lawsuits and see what happened in them. Many times it's an easy red flag. Sometimes it's ambiguous, but even then, why should I bother with the company that has numerous unresolved lawsuits, versus another company that is virtually the same but has none. Again, others might feel differently here.
3) property level due diligence: (takes seconds to weeks per deal): here is where I drill in with the low-level details.
a) pro forma popping: I examine all the assumptions, and see if they are overoptimistic or not. I look at every single item in the pro forma and imagine that it is complete BS, and see if I can challenge it. If there's a hole, it may be a red flag.
b) sensitivity analysis: I examine all the assumptions, and make sure I can live with the worst case scenarios.
c) "Stall and see": if they are getting money over multiple years, and there is no penalty for investing later, I would usually wait so I get some real performance data, versus having to look at theoretical pro forma information.
d) Recession stress test: I will not invest in anything, until I subject it to recession level stress and see if I can live with the result. And I take the worst recession I can find in the recent past. Sometimes there is only great recession data, and that recession was pretty mild on some asset classes, versus previous recessions. So I will usually 1.5x or 2.0x the stress. If the deal collapses and I would lose everything, I'm out. Others might be fine with taking risk, but least by doing this a person can get an idea of what might go wrong.
e) Legal document analysis: it will usually take a few days to go through the legal document properly, as almost inevitably there are tons of gotchas that either have to be explained, or mitigated with a side letter.
That is the very short summary of what I do. If you want more information, p.m. me and I can give you a lot more details.
The Real Estate Crowdfunding Review - Member since 2023 · 5 posts · 1 vote3y
Quote from @Lien Vuong:
Post the details here and we can take a look for you. If it is a true syndication, are they accredited? SEC filing? That's first and foremost in the due diligence (understanding their firm and past performance). The second would be analyzing the deal. Both very important and you need to pay close attention to them.
Thanks @Lien Vuong for your response. Yes they are accredited, w/ SEC filing. The firm has a track record of success with past deals in the market of this particular investment.
In analyzing the specific deal, here are the high level bullet points:
• 7 multi family unit new construction in Dorchester
• Limited Partners will be placed in a second position behind the construction loan and will not be responsible for any recourse. The General Partner, also acting as the Sponsor, will manage the entirety of the development, obtain financing for the construction, and sign all recourse for the loans.
• All Preferred Equity will receive a non-cumulative annual preferred return of 15%.
• Construction debt is projected to be paid off by the sale of the fifth unit. All cash-flow thereafter will be split pro rata to the LPs the General Partners until the 15% Preferred Return is achieved. Once the Preferred Return is achieved, all remaining cash-flow will be split 30% to the Limited Partners and 70% to the General Partners.
• Based on the current pro forma, Limited Partners are projected to receive a 45% total return, a 30% annual return and an IRR of 33%. All Limited Partners will receive a percent ownership in the deal as collateral.• The syndicator is securing the construction note personally and is also investing in the deal, and FWIW i know the syndicator well is very trustworthy
The pro forma provided at this stage is very high level but they will be sharing more details on cost forecasts in a couple weeks.
Anything jump out or deeper questions you would ask? Thanks so much for your perspective!!
- Member since 2023 · 5 posts · 1 vote3y
Quote from @Jonathan Greene:
Did you read The Hands-off Investor by @Brian Burke? That is a great primer for investing in syndications. Remember first that the operator is likely more important than the property. You are investing in an asset, but that asset is run by an operator. The operator's (GP) experience and track record is probably the most important part of the equation. What was their worst return? What return timeframe are you looking for? What is their information delivery system to LPs and how often? This should get you started.
The Hands-off Investor was an excellent book. I have read it and reference back to it all the time
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
@Sam Magnant
How much is GP putting into the deal?
What amount is being financed and what are those terms ?
Has the sponsor built in this area in the past?
33% IRR with only 30% upside would have me wondering how are they getting such a good deal.
7e investments53 Reviews - Member since 2023 · 5 posts · 1 vote3y
Quote from @Ian Ippolito:
Sam,Quote from @Sam Magnant:
Hello there - I have an opportunity to invest in my first syndication deal for a multifamily in Boston, MA. I have read and studied syndications and analysis pretty deeply, but am looking for a second (and third... fourth...) set of eyes on the deal to see if there is anything I missed. What would you do if you were in my shoes?
For vetting a syndication, different investors do it differently because every investor comes from a different financial situation and has different goals and risk tolerance. For me, I'm a very conservative investor and may look through a hundred deals a month, and at the end of the year only invest in 4-5. So things that are a red flag for me may be fine for someone more aggressive. Here's how I do my due diligence:
1) Portfolio matching: (takes 30 seconds per deal)
a) Have an educated opinion on where I think we are in the real estate cycles (financial and physical market cycles)
b) Then and only then do I pick the strategies, capital stack, and specialized asset subclasses that make sense for that opinion. For example, I am a little concerned about some aspects of the business cycle recovery and a potential for a double-dip so I lean toward the safest part of capital stack which is debt (or low-debt equity). I won't go with the riskiest opportunistic strategies, and will stick to core and core plus mostly with some value-added. I won't be investing in the riskiest/most supportable asset subclasses such as hotels, and tilt my portfolio the ones that have historically been more stable such as multifamily and single-family housing. I also don't want refinancing risk, so any deals with only 3 to 5 year debt are out for me. For someone that's not as conservative, or a different view on the cycle, they might have a different opinion than me on all of this.
2) Sponsor quality check: (takes about 45 minutes per deal)
I believe that a great sponsor can take an average looking deal and make it great, and that in mediocre sponsor can take a fantastic looking deal and make it bad (especially if there is a severe recession). So I start with the sponsor first. Again, others might disagree.
a) Track Record: Get the entire track record for the strategy. As easy as this sounds, it's not simple and usually like pulling teeth. Many times they will claim it's wonderful and then try to hide their worst deals by only showing completed deals. Make sure to get unexited deals. Or if they are doing value-added multifamily, they will show you their hotel experience. That doesn't cut it for me. I want a specialist that's an expert, and not a jack of all trades and master of none. Also, in a mainstream asset class like value-added multifamily, I see no reason to take a risk on a sponsor that doesn't have full real estate cycle experience or that lost anything more than a small amount of money (and prefer no money lost). Again, other might feel differently here.
b) Skin in the game: as a conservative investor, I understand that the dirty secret of industries that the waterfall compensation is in the line with me and incentivizes sponsors to take more risk. So I require skin in the game (average is 5% to 15%) to offset this. Contrary to popular belief, this is not set because I believe it will give me a higher return. I believe it tends to give me a slightly lower return, because the sponsor is going to be more careful, and if there is a severe downturn will prevent me from taking catastrophic losses. Someone that is more aggressive, may want lesser even though skin in the game. Also, if the sponsor is new, I am fine with less skin in the game as long as it is significant to their net worth. On the other hand if they are a sponsor that is experienced in stopping a skin in the game, that's a huge red flag for me.
c) how open to scrutiny are they? I always discuss investments with others in an investor club because other people might think of things that I might miss. And even though virtually every sponsor agreement allows me to share investment information with others who might be advising me on it (especially when club members are bound by an NDA), I still ask the sponsor if I can share it, because it's a test. Most are fine with that, but a few will have problems with it and claim there are legal issues, etc.. That's a red flag for me.
d) death by Google: I Google everything I can about the sponsor. I check the SEC, FINRA, ratings websites for inside information on the principals in the company. I also look for lawsuits and see what happened in them. Many times it's an easy red flag. Sometimes it's ambiguous, but even then, why should I bother with the company that has numerous unresolved lawsuits, versus another company that is virtually the same but has none. Again, others might feel differently here.
3) property level due diligence: (takes seconds to weeks per deal): here is where I drill in with the low-level details.
a) pro forma popping: I examine all the assumptions, and see if they are overoptimistic or not. I look at every single item in the pro forma and imagine that it is complete BS, and see if I can challenge it. If there's a hole, it may be a red flag.
b) sensitivity analysis: I examine all the assumptions, and make sure I can live with the worst case scenarios.
c) "Stall and see": if they are getting money over multiple years, and there is no penalty for investing later, I would usually wait so I get some real performance data, versus having to look at theoretical pro forma information.
d) Recession stress test: I will not invest in anything, until I subject it to recession level stress and see if I can live with the result. And I take the worst recession I can find in the recent past. Sometimes there is only great recession data, and that recession was pretty mild on some asset classes, versus previous recessions. So I will usually 1.5x or 2.0x the stress. If the deal collapses and I would lose everything, I'm out. Others might be fine with taking risk, but least by doing this a person can get an idea of what might go wrong.
e) Legal document analysis: it will usually take a few days to go through the legal document properly, as almost inevitably there are tons of gotchas that either have to be explained, or mitigated with a side letter.
That is the very short summary of what I do. If you want more information, p.m. me and I can give you a lot more details.wow - thank you for the detailed post Ian. This was super helpful and generally aligned to how I am approaching things, with some added tactics to try so thank you for that!
It strikes me that so much of the sponsor diligence is placed on the individual - are there centralized networks where reviews of sponsors can be crowdsourced? It seems so inefficient and error prone to diligence sponsors on a one off basis in this way (perhaps necessary due to SEC laws...)
Also another thing I'm learning, a lot of this business is very very much word of mouth. How would you suggest someone new to syndication investing "joins the conversation" and also can be the benefactor of referred deals and/or sponsors?
thanks again!!!
- Member since 2023 · 5 posts · 1 vote3y
Quote from @Chris Seveney:
@Sam Magnant
How much is GP putting into the deal?
What amount is being financed and what are those terms ?
Has the sponsor built in this area in the past?
33% IRR with only 30% upside would have me wondering how are they getting such a good deal.
$1m equity and $4m debt. GP hasnt closed financing yet but when they do they'll share terms
Yes the sponsor has build in the area in the past (new construction on 3 diff projects, all successful), and he is in for "low 6 figures"
Can you say more about this? "33% IRR with only 30% upside would have me wondering how are they getting such a good deal." Why does that jump out to you?
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
Quote from @Sam Magnant:
Quote from @Chris Seveney:
@Sam Magnant
How much is GP putting into the deal?
What amount is being financed and what are those terms ?
Has the sponsor built in this area in the past?
33% IRR with only 30% upside would have me wondering how are they getting such a good deal.
$1m equity and $4m debt. GP hasnt closed financing yet but when they do they'll share terms
Yes the sponsor has build in the area in the past (new construction on 3 diff projects, all successful), and he is in for "low 6 figures"
Can you say more about this? "33% IRR with only 30% upside would have me wondering how are they getting such a good deal." Why does that jump out to you?
33% IRR in todays economic conditions seems 2x+ better than what others can do.
7e investments53 Reviews - 3yLien VuongBusiness MemberReal Estate Agent · Boston, MA · Member since 2018 · 2k+ posts · 1k+ votes
Overall I think the deal looks good and if the area of Dorchester is correct in where the resales are (Dot is particularly sensitive street by street), you should be able to achieve these returns. They've provided much more data than other smaller development companies provide in this area and sounds like they're welcoming newbie investors which is rarer (typically only accepting Accredited Investors). If your numbers are sounds and gut check is correct then I would proceed.
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