How to vet syndicators

42 Replies

For those of you who invest with syndicators, what is your vetting process? Analyzing a deal seems pretty straightforward to me, vetting a syndicator, not so much. 

Originally posted by @Rachel Bjorklund :

For those of you who invest with syndicators, what is your vetting process? Analyzing a deal seems pretty straightforward to me, vetting a syndicator, not so much. 

To vet the syndicator, you need to carefully scrutinize their track record. Look at previous deals.  Check out how they did in the last downturn. Make sure you verify everything, don't trust whatever story they tell you.

-Christopher

Thanks, @Christopher Brainard . What would you consider a good track record? Personally, I'd find it difficult to invest with someone who hasn't been through a downturn, but I don't know if I'm being too picky. 

well we have to all start somewhere.. but I like your thought process.. its much easier to do these deals when things are rosy.. the rubber meets the road when things are not.

although well cashed up sponsors could mitigate the lack of long term experience  in the market place.

choosing the right sponsor is in my mind as critical if not more so than the deal itself.

@Rachel Bjorklund as it has been said above the sponsor can be more important than the deal. A bad sponsor can take a good deal and make it crash and burn. On the other hand a good sponsor can take a mediocare or even poor deal and make it exceptional. As mentioned track record is the easiest indicator of this. 

Sydication is a partnership while one side is passive and the other active it is a partnership nonetheless. It is my belief the vetting process is to be catered to the parties in that partnership not just a industry norm. 

When forming that business relationship the role of the sponsor is to ensure the the investor is fully aware, capable and comfortable with the sponsor and than the deal. Even If this takes one call or 5 years. 

I have actually had an investor say "would you be comfotable if I contacted your parents as a refrence?" All though I thought it strange I agreed. When I asked why he wanted this in addition to our other refrences he responded "If your own mother wont give you a good recomendation than I know I dont need to look further".  The point of the example is there is no right way. Only that we make sure all parties are comfortable with each other. If that can't happen than capital should not be exchanged. 

Something else to consider in that process is how the track record was built. Did the sponsor grow and learn on thier own dime before rasing capital or did they test the waters with other peoples money. Here is an article I wrote on the mindset I believe should be adopted by those raising money. If you feel a sponsor doesnt have this I'd avoid. 

@Rachel Bjorklund@Jered Sturm and @Jay Hinrichs are right on.  I'd even go one step further and say that the syndicator is the deal.  

The best deal you can analyze in your due diligence in the hands of a not so great syndicator is a recipe for failure.  Conversely, a bad deal should never make it to your plate from a good syndicator.

Their analysis should always be more comprehensive and accurate than what you are capable of or you're talking to the wrong syndicator. 

Thanks, everyone! I so appreciate you taking the time to share your wisdom with me.

@Michael Dang , Thank you for that great resource! That is exactly what I needed. Have you used the advice yourself or are you trying to build a business by that example?

@Jay Hinrichs , You make a good point about cash reserves as one way to mitigate experience. I guess I would also be looking for a pattern of resilience and the ability to solve problems. It's amazing how some people fall apart at the first sign of difficulty.

@Jered Sturm , I appreciate your comment about syndication as a partnership, and I love the idea behind the "Mom" test even if I would never ask that. I completely agree with your thoughts on mindset. I hear too many things about the benefits of reduced risk for the sponsor, without any regard to the responsibility that comes with that. 

@Dave Foster , You make a compelling case for the SYNDICATOR being the deal. My gut said that same thing, but your logic that bad deals don't come from good syndicators confirmed it for me. Well put.

@Rachel Bjorklund , I wouldn't be overly concerned with Sponsors who have not been through a down turn. Rather, look for the presence of a sensitivity analysis that shows how the asset will perform in the event of a downturn and how low vacancies can fall while still allowing the asset to produce a return for investors. This is huge!

Also, absolutely look for Sponsors who have a history of under promising and over performing (i.e. conservative underwriting). Underwriting that highlights the upper limit of potential performance would be a red flag to me.

I agree with @Michael Dang , take a look at @David Thompson 's "Vetting an Apartment Deal Sponsor" - he offers some great insight.

I'd be happy to connect and discuss further. Best of luck!

@ David Foster. Excellent advice. I recently reviewed an MU proposal that included detailed pictures (overview from different angles, sample interior shots),  info on building's roof, boiler and possible repair costs, analysis of cash and projected costs, evaluation of site and immediate neighborhood, potential, cost effective ways to improve the property. Well worth the origination fee. Agree that the syndicator is the deal.

Is the sponsor detailed? Are they organized? Are they well funded? Are they working within their scope? what is their support team? what is their reasoning for the deal? How will they make sure that the business plan is followed and do they have a detailed business plan? 

A sponsor should be running the deal as a business, so everything should look, feel and smell like a business. 

I think making sure the sponsor is moral, ethical and honest is very important, but you also want to be sure they are operating a business properly and not just winging it. 

I second @David Thompson 's post on vetting the sponsor.

However, as @Michael Bishop mentioned, I would look at how the sponsor underwrites the deal.

Are they being conservative in their assumptions (capex, rent increases, reserves, exit cap,hold period, refinancing, etc)?

Having invested in over 1000+ units, I have expanded my pool of syndicators (a form of diversification) and typically look at the above criteria in addition to sensitivity analysis around interest rates and exit caps. 

Another important criteria is how much of their own money are the sponsors putting in the deal?

As for finding a syndicator who has been through the market downturn, the reality is that there are very few who have while syndicating (did this term exist in this context in 2007-2009?) in the same asset class. There are very good operators who have not been through the downturn or were focusing on a different asset class then.

Many good observations here. @Perry agree completely about how much money are they putting in. No skin in the game? I'm not interested. I see articles about the "invest with other people's money" strategy. Own an apartment building (well a portion) with no money down and no risk. These are the "syndicators" to avoid. 

Has anyone heard of Ashcroft Capital? 191M portfolio with focus on large B grade MU's. Income stream (quarterly basis). AC does the value added investing (small improvements, major remodels, rebrand, etc as appropriate) and cash out/refi possibly 5 years. Passive investors profit as well.

Syndication (passive or perhaps active participation if it's an option) looks like an excellent idea. I'd appreciate PM's on folks to contact (and not contact)

@Jered Sturm   too funny many of us our mothers are no longer with us... well my mom is 83 and going strong.. LOL.. and she better think I am great :)

Thanks, all! More great insights to ponder. : )

@Michael Bishop , Thanks for the tips about the sensitivity analysis and conservative underwriting.

@Todd Dexheimer , Good points. I would definitely want to work with someone who is a competent professional, not just a nice person.

@Percy N. It's nice to hear from a fellow investor that is not a deal sponsor. : ) I appreciate your insight on how few syndicators have been doing this for a decade+. I asked if I was being too picky, and I think I have my answer...

@Jim Watson , There's no way I would trust someone with no skin in the game, unless I had past history with them. It's crazy to me that some sponsors get a hefty percent of the upside, but stand to lose nothing if the deal goes south. If you are not putting equity in, then how are you a partner? Perhaps some people have so much deal flow and too many investors to keep up with their own capital, but in general, this seems like at least a "yellow light" if not a red flag.

@David Thompson , Thank you so much for chiming in with the links. #10 Holistic Win/Win is such an important point. I would be concerned about somebody who doesn't look out for all their stakeholders, including their residents.  I look forward to re-reading these articles and internalizing the concepts.

Run a background check on them too.

I'd recommend the following podcast and checking out other podcast interviews where Jeremy Roll is the guest.  He current has 70+ individual investments in syndicated deals. He also represents a large group of passive investors and shares investment opportunities with them.

http://forinvestorsbyinvestors.com/library/episode-2-how-to-build-a-passive-real-estate-portfolio/ 

Thanks @Mike Dymski ! I listened to the podcast last night and learned a lot. Jeremy's detailed information about running background checks was especially helpful. If a basic one can be done for about $6, there's no reason not to.

@Rachel Bjorklund a few things I do is ask around who has been in their deal before. You could ask for references but that might be a moot point.

Im transition my portfolio from sfh to syndications and even though the returns are lower it’s scalable. I think it just works well if you go around and show one card at a time ... “did you work with bob d?” Or heard of this guy....

Wow what a timely thread for me! ( Door knocking for off market MFU's in the next week. ) 

Thank You All.

Michael Dang what a great link! Very Helpful!

As an expansion or similar idea to this threat, would your vetting process or consideration be similar if you were actually bringing to deal to the table for the GP or Sponsor to syndicate? 

My guess is yes? Or would someone simply JV with a experienced Sponsor or experienced Syndicator? Or maybe a straight JV with a money partner would be a better option all around?

I have zero experience with syndication or closing commercial MFU's, But I have years of experience finding off market deals.

@Rachel Bjorklund

You have received a ton of valuable advice here! Speaking from personal experience while looking for syndicated deals myself: I'd recommend to double and triple check all the information you receive from a syndicator/sponsor. Google is a beautiful tool when it comes to researching anything and anyone! I'd utilize it to the fullest! The research should cover both: personal and professional bio's.  Do not ask for references. Identify them while researching a syndicator and contact directly. You'll be amazed how much you can learn about a person this way. :)

If you would like to speak futher, feel free to PM me directly.

My best! 

Alina

Thanks, @Alina T.! 

I appreciate your tip about references. I've wondered how useful that really is, and you offer a compelling alternative. 

@Rachel Bjorklund

To answer your question.  Yes, I am using some of the advise and can attest that the advise works.  There are a great number of syndicators out there with different syndication models, so definitely vet and if you don't get a straight answer I would consider it a red flag or push to clarify the answer.

I agree with what most people posted from track record to background check and everything in between.  It also very important that their structure is aligned with the investor. Low fees so they only make money if you make money. The promote should be 70/30 or higher.  80/20 is better but tough to find.  They need to have REAL skin in the game.  Not just their upfront fee.  Money from their own pocket.  Some have GP funds which is really investors money, but they will claim it as their own.  Ask to see their reporting statements from prior deals.  I rarely trust a syndication that can't communicate  or produce an informative/accurate/timely investor statement.  

Here's my list. I often teach this as a public service for investors: 

Checklist: 10 Things You Should Know Before Investing in a Syndication

Before investing in a real estate syndication, you should carefully review all of the offering documents provided by the sponsor and look for (or ask) questions regarding the following things:

1. The Sponsor’s background, education and experience with similar investments, if any.

2. The team members involved in acquisition and operation of the property, including attorneys, CPAs, other members of the sponsor, property managers and affiliates that may receive fees, etc.

3. Cash distributions to investors during acquisition, operation and disposition of the property, including the proposed timing and anticipated percentage returns.

4. Sponsor fees and cash distributions.

5. Anticipated duration of the investment.

6. Property information, including its type and condition, the purchase price, financial history, proposed “value add” and exit strategies and pro forma financial projections.

7. Dispute resolution provisions in the governing documents for the company selling the interests to investors. 

8. Voting rights of investors.

9. Provisions for removal of the sponsor.

10. Information about the law firm that structured the offering and drafted the offering documents, and whether the firm is experienced with securities offerings, and has errors and omissions insurance.

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