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Updated over 5 years ago on . Most recent reply

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11
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Kevin Nguyen
  • Investor
  • Houston, TX
2
Votes |
11
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Key Prinicipal - what exactly is it?

Kevin Nguyen
  • Investor
  • Houston, TX
Posted

An investment group found a 140 unit apartment complex valued at about 8 million.  They opened up the opportunity to be a KP to the public, however they are selective.  As far as responsibilities, it seems that it allows me to be hands-on with property operations.  It seems like a very good opportunity for me to dive in and learn....too good.  Why?  I have no experience. 

I've read (on the forums) that Key Principals are usually brought in because the lender requires a person with more experience OR a person with more liquid net worth to be on the loan.  However, none of these requirements were listed to be a KP in this deal.  Plus investment to be a KP in this deal is low -- well below 100k.  

Is there a traditional or standard role for KPs in apartment investing? 

Most Popular Reply

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36
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30
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Shane Thomas
  • Rental Property Investor
  • Houston, TX
30
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36
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Shane Thomas
  • Rental Property Investor
  • Houston, TX
Replied

Key Principals (KPs) are also known as Guarantors and is a term used by Agency lenders (Freddie Mac and Fannie Mae) on non-recourse commercial loans. Although agency loans are non-recourse, there are certain "bad-boy" carve-outs (e.g. misrepresentation, bankruptcy, etc.) that could grant the agencies recourse against the KPs. There are a number of criteria to qualify for a agency loan but 3 major ones are past experience, net worth of KPs > loan amount and some liquidity threshold.

Typically, the sponsors of the deal are automatically considered KPs and usually they have the past experience but sometimes don't meet the net worth or liquidity requirements. In such event, KPs can be added to help the sponsors meet the requirements.

In most deals I have been involved in as a passive, non-sponsor KPs do not have an active role in managing the asset. The KPs are typically passive investors. In certain cases, KPs could be compensated for what they bring to the table and in other cases they may not. Sometimes sponsors meet all the requirements but still bring on KPs so that the KPs can get "agency" experience, which will help them when they sponsor their own deal and apply for a loan. In the end, the structure of how KPs are used and compensated depends on the situation. However, it is important for KPs to understand their role and potential risks (due to the carve outs) and should certainly understand the business plan and track record of the sponsors they are working with.

I hope this helps. 

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