What do you think of this syndication deal?
Most Popular Reply
Ian IppolitoBusiness Member
Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votesEvery investor has their own process for looking at deals. Here's the process that I use. Background: 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.
1) Portfolio matching: (takes 30 seconds per deal)
a) Have an educated opinion on where you think we are in the real estate cycles (financial and physical market cycles)
b) Then only then pick the strategies, capital stack, and specialized asset subclasses that make sense for that opinion. For example, I think we are late cycle, so I lean toward the safest part of capital stack which is debt (or debt free 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 next recession, 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 and didn't lose money. 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.
____
Personally, for triple net lease, I like Broadstone Net Lease and have invested in it myself. It has really low fees, high skin in the game from the sponsor, and full real estate cycle experience with no money lost. It also has hundreds of properties diversified across the country.
The Real Estate Crowdfunding Review
18 Replies
- Rental Property Investor · Tampa, FL · Member since 2015 · 1k+ posts · 969 votes7y
Hi Jack,
It would take pages to outline exactly how to analyze a deal as a passive investor, but here are a few tips:
- The team
- What is their track record with similar deals in the past? Have they taken a deal full cycle
- Who is on their team (property management company, GP)? What is their track record?
- The deal
- What is the going in-cap rate?
- What is the hold period?
- What are the return projections?
- What assumptions did they make?
- What is the exit strategy? Sales assumptions? How were those determined?
- What is the debt structure?
- The team
- Property Manager · Orlando, FL · Member since 2016 · 479 posts · 277 votes7y
@Jack B. Not sure who JRW investments is, but this is a blind real estate fund for ExchangeRight that you would be investing in. They have sole discretion how the money is used and where it is placed and for how long.
This is very different from a single deal in that you won't know what deals they're going to purchase before you invest. If it's a rolling offering they may have already acquired a few properties and you can look at those, but theres nothing saying they're going to buy similar or same stuff. And just because a fund says they're going to target triple net leases in the southeast USA, doesn't mean they can't go buy a ground up development in Seattle or something like that.
There is nothing wrong with it, it really just depends on what your goals are personally and what type of risk/returns you want to achieve when investing your money.
Originally posted by @Chris Grenzig:
@Jack B. Not sure who JRW investments is, but this is a blind real estate fund for ExchangeRight that you would be investing in. They have sole discretion how the money is used and where it is placed and for how long.
This is very different from a single deal in that you won't know what deals they're going to purchase before you invest. If it's a rolling offering they may have already acquired a few properties and you can look at those, but theres nothing saying they're going to buy similar or same stuff. And just because a fund says they're going to target triple net leases in the southeast USA, doesn't mean they can't go buy a ground up development in Seattle or something like that.
There is nothing wrong with it, it really just depends on what your goals are personally and what type of risk/returns you want to achieve when investing your money.
Yikes, thank you! Considering the interest rate and the risk free rate, that's a lot of risk for a team that has all the control and I can't find any references for. I'm going to pass. Thanks all!!
- Property Manager · Orlando, FL · Member since 2016 · 479 posts · 277 votes7y
@Jack B. I’m not sure I agree it’s that risky. Usually funds like that are extremely diverse and tend to invest in properties that are less risk averse which is why they offer projections of 7%. Vs a deal like we do which has more risk and offers returns of 18%+ or in that range. Or a flip deal which can offer 10-12%. I think more research needs to be done before assessing the risk imo.
- Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes7y
@Jack B. Prior to evaluating a deal, perhaps you can share what your RE goals are. Are you looking for something aggressive or conservative? What asset class? Is this investment type part of your diversification strategy? Do you have one?
Feel free to PM me if you prefer to go over your plans privately.
- Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes7y
The asset class seems to be commercial businesses.
I think to adequately be able to know if this is a good deal you need to send at least 40 hours studying and at that point you are not getting into the P&Ls and rent rolls.
Stick with SFH or now if your net worth is under 500k.
Originally posted by @Lane Kawaoka:
The asset class seems to be commercial businesses.
I think to adequately be able to know if this is a good deal you need to send at least 40 hours studying and at that point you are not getting into the P&Ls and rent rolls.
Stick with SFH or now if your net worth is under 500k.
My net worth is 1.5 mil.....
Originally posted by @Alina Trigub:
@Jack B. Prior to evaluating a deal, perhaps you can share what your RE goals are. Are you looking for something aggressive or conservative? What asset class? Is this investment type part of your diversification strategy? Do you have one?
Feel free to PM me if you prefer to go over your plans privately.
Looking for a place to park money and watch it grow. Nothing too risky. At this point growth is important but keeping the money I have made is more important.
Originally posted by @Chris Grenzig:
@Jack B. I’m not sure I agree it’s that risky. Usually funds like that are extremely diverse and tend to invest in properties that are less risk averse which is why they offer projections of 7%. Vs a deal like we do which has more risk and offers returns of 18%+ or in that range. Or a flip deal which can offer 10-12%. I think more research needs to be done before assessing the risk imo.
That makes sense. They had another fund, Telos 4 I believe, that was 18% returns, but the tenant base was really risky IMO. A brewery, some art lofts, and small mom and pop shops. Considering a recession is looming, I don't feel comfortable investing in commercial that is not necessity businesses (dentists, drug stores, grocery stores, etc.) not to mention established national chain necessity businesses rather than "Shawna's Art Loft where she paints during good times when people have disposable income to buy her art" type of commercial.
- Property Manager · Orlando, FL · Member since 2016 · 479 posts · 277 votes7y
@Jack B. yea that makes sense, I would look into more what type of assets they will be targeting, from my own quick glance it looked like triple net leases and B class multifamily assets.
I agree 100% on economy which is why we're looking at almost all our deals now on a 5+ year time frame, lower leverage, and workforce housing with average rents sub $1000-$1,1000.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Jack there is a 6% fund in Oregon that is basically bullet proof.. and you can pull your funds with i think 30 days notice.
check out Iron Bridge in Portland ... and if you would like a persona referral happy to do it.. I do not get compensated for referrals by the way LOL.. but i have had some of my clients put funds there.
- Property Manager · Orlando, FL · Member since 2016 · 479 posts · 277 votes7y
@Jack B. yea that makes sense, I would look into more what type of assets they will be targeting, from my own quick glance it looked like triple net leases and B class multifamily assets.
I agree 100% on economy which is why we're looking at almost all our deals now on a 5+ year time frame, lower leverage, and workforce housing with average rents sub $1000-$1,1000.
Originally posted by @Chris Grenzig:
@Jack B. yea that makes sense, I would look into more what type of assets they will be targeting, from my own quick glance it looked like triple net leases and B class multifamily assets.
I agree 100% on economy which is why we're looking at almost all our deals now on a 5+ year time frame, lower leverage, and workforce housing with average rents sub $1000-$1,1000.
The NLP deals on page 7 of the summary look like already decided assets (Napa auto parts, Walgreens, Dollar General, etc.).
There are only note funds that I saw in there toward the end of the summary where they are just looking for money from investors to decide on assets to purchase.
Take another look, looks like most of the deals are decided real estate deals with national retailers.
- Property Manager · Orlando, FL · Member since 2016 · 479 posts · 277 votes7y
@Jack B. so the document is NLPEF 4 which I would assume is their 4th fund for Net-leased preferred equity fund like on page 9, rather than like the funds on page 7/8. Basically they're giving investors a fixed rate of return on equity and the syndicator keeps any upside or a significant portion of the upside. You'd really have to look at operating agreement to see how the profits and cash flow are split among different class of members to see if the fund investors participate in any of the upside.
When we've received term sheets on pref equity for our deals, most are 100% of profit until an 8-12% return and then us as the syndicator/sponsor keeps any upside over and above that. However, there are some that do a split over that percent, but it's often times like 80-20 syndicator - investor/fund.
Tbh this document is pretty vague and I'm assuming they'd have a much more detailed business plan available to anyone that requested it, or something of the sort.
- Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes7y
I'd refrain to post TMI about your personal net worth and etc on a public forum. Expect your inbox to be loaded with messages with various offerings. :)
Ok, jokes aside, the definition of conservative investment may differ from one investor to another. While for instance, I think you can still find relatively conservative syndication offerings these days (which constitute equity offerings), someone like @Ian Ippolito may suggest to stick to debt offerings only at this time.
To elaborate further on syndications as it is too general of a term, there're assets that perform better during the downturns. Take for instance MHPs. Generally during the bubble, people tend to move/stick to less expansive housing and since there aren't that many new MHPs being built the demand for this economically effective asset class is usually higher and it tends to perform better than majority of other commercial RE asset classes.
Another point to keep in mind is location, location, location... You have to consider whether the location where the syndication investment is offered can sustain the downturn.
Bottom line, you can look and evaluate multiple offerings, but at the end of the day it comes down to your personal choice and based on your personal situation (f.e., taxes, net worth, current financial situation, etc...)
- 7yIan IppolitoBusiness MemberInvestor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
Every investor has their own process for looking at deals. Here's the process that I use. Background: 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.
1) Portfolio matching: (takes 30 seconds per deal)
a) Have an educated opinion on where you think we are in the real estate cycles (financial and physical market cycles)
b) Then only then pick the strategies, capital stack, and specialized asset subclasses that make sense for that opinion. For example, I think we are late cycle, so I lean toward the safest part of capital stack which is debt (or debt free 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 next recession, 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 and didn't lose money. 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.
____
Personally, for triple net lease, I like Broadstone Net Lease and have invested in it myself. It has really low fees, high skin in the game from the sponsor, and full real estate cycle experience with no money lost. It also has hundreds of properties diversified across the country.The Real Estate Crowdfunding Review - Investor / Syndicator · Austin, TX · Member since 2015 · 367 posts · 220 votes7y
Many good insights shared above. I have a trifecta that I use, 1)The Market, 2)The Team, and 3) The Deal. I have a checklist of about 20-30 questions under each of these main areas that must be answered to get me to the place where I feel I've done a thorough job of asking questions. These types of deals are complex, so I'd recommend a process approach like this in your diligence. There are simply too many things to look at and examine. Working through a structured diligence plan is less exhausting and it allows you to analyze more deals. It also ensures you don't miss something big.
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