How to vet syndicators
Federal Way, WA · Member since 2017 · 35 posts · 36 votes
How to vet syndicators
Most Popular Reply
Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes@Account Closed you’ve been given some great things to look for already but I saw a few things that haven’t been mentioned (or I just missed them).
- Ask to see the performance of their full-cycle deals. Compare the actual performance to the projected performance so you can see if they achieve the results that they forecast. If they haven’t had any full cycle deals, they might not have enough experience to justify investing with them—they are untested if they’ve never sold a property. Unless you are a test pilot, you wouldn’t fly in a plane that has proven to successfully take off, but has never proven it can land, would you?
- Ask to see comparisons between actual and projected performance of properties in the portfolio—this gives insight into how well they are managing currently. How many properties they are buying or the returns they are projecting are not the yardsticks for their success. The Measurement should be if they achieving the NOI and distributions that they had forecasted on the stuff they've already bought.
- Ask about the worst deal they’ve had or one that didn’t perform according to plan. What you are listening for is how they handled it. Their real character is revealed when things go wrong, not when things are going right. If they say they haven’t had one, they just haven’t been doing it long enough. So, will the one you invest in be “the one”?
- Ask if they are obtaining financing based on their own cash reserves and net worth, or are they relying on “loan sponsors” to bring the financial strength needed to qualify for debt. Lenders require the borrower’s key principal(s) to have a specific net worth, such as 1:1 on the loan amount, and cash reserves, such as 10% of the loan amount. If the sponsor has to bring someone in to meet those requirements, you might have an undercapitalized sponsor.
- Visit their office. You might find that some don’t even have one. Are they working out of their bedroom? Have no staff? You’ll find out, plus you’ll get to look them in the eye and shake their hand (even in today’s world of email and text messages, this is still relevant). Not to mention, you’ll find out if they are even willing to carve out that slice of time for you. If they aren’t willing now, they won’t be later when you have questions after you’ve made your investment.
- Ask about their team. Is this a one-person shop? Key man issues could be a problem if the only guy that knows what’s going on dies. So ask about the depth of their team and staff, and succession plan in the event that something unfortunate happens to one of them.
Finally, I’ll offer a contrasting point of view on the “skin in the game” topic. For full disclosure, my point of view comes from two decades of being an investment sponsor so it wouldn’t surprise anyone that my opinion is that this topic is highly overrated.
Investors are misreading the psychology if they think that having my own personal cash in a deal is going to cause their investment to perform any differently. Or that I could walk away and risk nothing if I have no cash in a deal.
I invest in my deals when I can, because I want a return on my money just like anyone. But I can’t invest in all. To qualify for loans I have to have very specific cash reserves. To get deals in contract I have to put up very large earnest money and financing deposits (can be $500K or more in some cases). Plus I have to front upfront costs for legal, inspections, etc. and if there is more than one property in contract you can double that capital outlay.
So I say that my cash is the spark, your cash is the fuel. I’ve had investors opt out because I didn’t have 10% of the equity committed from my own cash. I’ve raised over $75 million, if I had 10% in every deal that would be $7.5 million. Investors are sensitive to how much sponsors charge in fees—but how much would I have to charge in fees to have an extra $7.5 million laying around?! The math just doesn’t work.
Instead, I see it this way: I have cash reserves so I’m never in a position to feel like I have to do a bad deal just so I can earn a fee and make a living. And I’ve been the first one to take a bullet for my investors, sacrificing my own financial well being to protect my investors. If I walk away from a deal, the last thing on my mind would be my $100K skin in the game. If I ever did that it would be the last time I’d earn the trust of the very folks that provide the lifeblood of my business. So this means I have more like $75 million and my future income stream at risk at all times.
I get it—if you are investing with a first time sponsor (why would you?), having skin in the game gives them something to lose. But an experienced sponsor (which is what you are looking for) has so much more at stake.
I hope that helps! Good luck in your search. With the collective total of the advice in this thread, you are very well equipped to avoid mistakes.
42 Replies
- Federal Way, WA · Member since 2017 · 35 posts · 36 votes9y
@Mark Robertson, Thanks for your point about the GP money being their own and not just what they received from the other investors (e.g. the acquisition fee).
- Federal Way, WA · Member since 2017 · 35 posts · 36 votes9y
@Kim Lisa Taylor, Thank you for this fantastic (and eye-opening) list. I would not have thought of #9 for example. Are these standard items that should be in a PPM?
- Chicago, IL · Member since 2016 · 94 posts · 87 votes9y
@Account Closed
Hi Rachel,
One thing that I didn’t see specifically mentioned in all the great advice you received here is the importance of the syndicator’s experience within the specific market/sub-market where the investment is being made.
If the syndicator has 10 years of experience running successful multi-family value-added deals in the sub-markets of Miami, this may not necessarily guarantee success for the syndicator doing the same type of deals in the sub-markets of Atlanta. Market fundamentals can vary widely based on location and it’s important that the syndicator is knowledgeable on how the market functions and what the future of the market looks like. For example, if the syndicator is not aware of a silent rash of new inventory that will hit the sub-market in 3 years but underwrites a value-added investment to make capital improvements which will drive increases in occupancy at their property, they may be in for a surprise. If the new inventory is comparable to the syndicator's property then this may result in the syndicator having to lower rents below pro forma to win the new tenants, and thus lowering returns from what was originally expected...potentially significantly.
In addition, if the syndicator does not have a footprint in a certain market it’s also possible that they are not connected with the broker community in that market. Lack of strong broker relationships could lock them out from getting access to potentially more lucrative off-market deals and could limit their pool of prospective buyers once their business plan has been executed.
All of this said, if the syndicator does not have prior experience in a specific market or compelling reasons why they are highly knowledgeable in the market they are investing in, then this should be considered as another layer of investment risk.
-Vince
- Federal Way, WA · Member since 2017 · 35 posts · 36 votes8y
@Vince DeCrow, thanks for weighing in! You make some really great points. While there are certainly many people who have done successful deals without having deep experience within specific markets, there's likely an element of luck involved.
One of my work colleagues used to manage a team of commercial multi-family loan officers for a major bank, and he has another angle on what valuable experience looks like. He told me yesterday that one of the questions they would ask is HOW LONG the investors had held their previous properties. That was more important the number of deals, because a long track record told them that the investor was likely a skilled operator who could grow and protect the value of the asset even if the market shifted over time.
- Chicago, IL · Member since 2016 · 94 posts · 87 votes8y
@Account Closed, I agree with your colleague. If the investment strategy is to buy and hold, then a sponsor who has held an asset for 15 years and kept it performing well among it's comp set over that period would certainly indicate to me that the sponsor is well versed and skilled in operating that type of property.
- 8yKim Lisa TaylorPro MemberAttorney · Saint Augustine, FL · Member since 2016 · 248 posts · 234 votes
Responding to @ Rachel Borglund's comment: "Thank you for this fantastic (and eye-opening) list. I would not have thought of #9 for example. Are these standard items that should be in a PPM?"
They are in the documents I draft, can't speak for other attorneys, but they are all things a client could ask to have included, or that an investor might want to know.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes8y
I think an important part not touched on from a syndicators point of view.
Someone mentioned split to sponsor of only 20 or 30% and then give 70 to 80 of upside to investors. I do not know hardly any syndicators who would do this. Too much risk and not enough reward for the sponsor. Now I do see it sometimes on MUCH LARGER DEALS.
I saw one the other day an office building for 55 million purchase 53% occupancy. Sponsor was taking 25% promote on back end. The ARV was supposed to be close to 100 million and needed 15 million worth of reno. So basically after resale fees and costs 25 million upside. 25% of 25 million upside is 6,250,000 to sponsor.
Smaller deal of 1 million total for example and 250k upside 25% is only 62,500. That small deal might take just as much time to exit than the larger property. I have found new syndicators who are trying to quit that J-O-B will look at that amount of money as workable. If you have other sources of revenue it is too small and not worth the syndicators time.
So deal size matters in what a sponsor agrees to. It can be a full time job to be bombarded with 1,000 questions from newer investors looking at syndicates especially if that 50k or 100k is a lot of their money. More experienced accredited investors know the risks and can make decisions faster. Additionally there are funds out there for syndicators and developers where the capital is already there for them and they can focus on deal after deal instead of a lot of hand holding for some passive investors. You tend to give up a little more return but you do not have to suck up a lot of time raising capital.
Syndicators have options for capital to and they will not be rail roaded just to receive some funds. There is a point where a syndicator would rather do nothing than agree with onerous terms that do not benefit them in the long run.
Just like their are lots of syndicators there are lots of passive investors. You have to find one that is the right fit for your business model. A lot of it comes down to trust. You either make the investment with the syndicator or you do not.
- 8yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
@Account Closed you’ve been given some great things to look for already but I saw a few things that haven’t been mentioned (or I just missed them).
- Ask to see the performance of their full-cycle deals. Compare the actual performance to the projected performance so you can see if they achieve the results that they forecast. If they haven’t had any full cycle deals, they might not have enough experience to justify investing with them—they are untested if they’ve never sold a property. Unless you are a test pilot, you wouldn’t fly in a plane that has proven to successfully take off, but has never proven it can land, would you?
- Ask to see comparisons between actual and projected performance of properties in the portfolio—this gives insight into how well they are managing currently. How many properties they are buying or the returns they are projecting are not the yardsticks for their success. The Measurement should be if they achieving the NOI and distributions that they had forecasted on the stuff they've already bought.
- Ask about the worst deal they’ve had or one that didn’t perform according to plan. What you are listening for is how they handled it. Their real character is revealed when things go wrong, not when things are going right. If they say they haven’t had one, they just haven’t been doing it long enough. So, will the one you invest in be “the one”?
- Ask if they are obtaining financing based on their own cash reserves and net worth, or are they relying on “loan sponsors” to bring the financial strength needed to qualify for debt. Lenders require the borrower’s key principal(s) to have a specific net worth, such as 1:1 on the loan amount, and cash reserves, such as 10% of the loan amount. If the sponsor has to bring someone in to meet those requirements, you might have an undercapitalized sponsor.
- Visit their office. You might find that some don’t even have one. Are they working out of their bedroom? Have no staff? You’ll find out, plus you’ll get to look them in the eye and shake their hand (even in today’s world of email and text messages, this is still relevant). Not to mention, you’ll find out if they are even willing to carve out that slice of time for you. If they aren’t willing now, they won’t be later when you have questions after you’ve made your investment.
- Ask about their team. Is this a one-person shop? Key man issues could be a problem if the only guy that knows what’s going on dies. So ask about the depth of their team and staff, and succession plan in the event that something unfortunate happens to one of them.
Finally, I’ll offer a contrasting point of view on the “skin in the game” topic. For full disclosure, my point of view comes from two decades of being an investment sponsor so it wouldn’t surprise anyone that my opinion is that this topic is highly overrated.
Investors are misreading the psychology if they think that having my own personal cash in a deal is going to cause their investment to perform any differently. Or that I could walk away and risk nothing if I have no cash in a deal.
I invest in my deals when I can, because I want a return on my money just like anyone. But I can’t invest in all. To qualify for loans I have to have very specific cash reserves. To get deals in contract I have to put up very large earnest money and financing deposits (can be $500K or more in some cases). Plus I have to front upfront costs for legal, inspections, etc. and if there is more than one property in contract you can double that capital outlay.
So I say that my cash is the spark, your cash is the fuel. I’ve had investors opt out because I didn’t have 10% of the equity committed from my own cash. I’ve raised over $75 million, if I had 10% in every deal that would be $7.5 million. Investors are sensitive to how much sponsors charge in fees—but how much would I have to charge in fees to have an extra $7.5 million laying around?! The math just doesn’t work.
Instead, I see it this way: I have cash reserves so I’m never in a position to feel like I have to do a bad deal just so I can earn a fee and make a living. And I’ve been the first one to take a bullet for my investors, sacrificing my own financial well being to protect my investors. If I walk away from a deal, the last thing on my mind would be my $100K skin in the game. If I ever did that it would be the last time I’d earn the trust of the very folks that provide the lifeblood of my business. So this means I have more like $75 million and my future income stream at risk at all times.
I get it—if you are investing with a first time sponsor (why would you?), having skin in the game gives them something to lose. But an experienced sponsor (which is what you are looking for) has so much more at stake.
I hope that helps! Good luck in your search. With the collective total of the advice in this thread, you are very well equipped to avoid mistakes.
- Investor · North Port, FL · Member since 2016 · 137 posts · 58 votes8y
I know I'm a little late to the party, but this thread is great as I'm beginning to need to syndicate deals to go bigger than I have.
I just want to thank everyone for the resources here!
- 8yGino BarbaroPro MemberRental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
@Account Closed
Hi Rachel,
I have been on both sides of the fence. We have yet to syndicate a deal, but if I was trying to vet a syndicator, I would like to have a clear picture of their business model and how they execute on their business plan. I would like to see some type of track record. I would like to see "realistic" underwriting, not optimistic projections. I would also like to see the syndicator have some of their own skin in the game. If they are willing to risk their own capital, then I am willing to give them mine to risk as well.
I would like to see their entire roster of team members, broker, accountant, syndication attorney, property management company, etc.
It would also be nice to see a what if scenario if their projections do not come to fruition.
Hope that helps
Gino
- Rental Property Investor · Plano, TX · Member since 2015 · 80 posts · 14 votes8y
As an investor who is just starting to study Syndication deals as a source for passive income, this thread has been great, very informative! Thank you all for those who have responded. I have a few SFH and MFs but as I get more units, the passive part decreases without a PM so I'm looking to get into Syndication to make it truly passive.
- Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes8y
The volume of vetting work required is a barrier to entry for me.
Sincerely, the ADD generation
@Account Closed - Ton's of good advice flowing here and another data point to add would be speaking with current and previous investors of said syndication team your interested in.
Specifically ask for an example of something that did not go to plan and how it was addressed/resolved.
Nothing goes 100% to plan. Issues arise that are unseen and something will ultimately breakdown. How an individual/team get's back on track and communication with specifics steps to resolve are key.
Credibility, trustworthiness & reputation are the currency of any good syndication team. Make sure they have plenty of that currency for you.
- Rental Property Investor · Remote · Member since 2017 · 10 posts · 1 vote8y
Hello @Account Closed
Here is my two cents basing on our syndication experiences in Seattle.
- Established Portfolio.
Generally in Seattle area, CRE is an exclusive game that only the established owners can get the good deals, and they'll most likely hear it off the market before everyone else does. So the first thing to evaluate is by their portfolio - how many buildings they currently have, and how long they've owned them (Usually it's hard for you to know how profitable they are unless you're investing in the whole pool).
- Underwriting.
Usually local banks prefer the experienced syndicators way more than anyone else, therefore they can get much better terms. If the terms attached to the deal is relatively good on top of a good portfolio, it's a good sign.
- Adding Value.
Most of the syndicators will advertise that they'll "raise the rents" or "add value", but how? Most importantly, how creative they are? If they're considering the game end-to-end, and it passes your bar of "yes I'll pay more rent for that", that will suggest they're doing the right thing.
- Break-Even Point.
We've all seen a downturn, and it's important to survive the cold winter. If their break-even point is fairly low, and they can survive without the rocket-high rents, it would be a huge plus.
Hopefully this helps.
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