First, see whether the syndicator provides you with the actual financials from the seller, so you can underwrite the deal yourself if you want to and see if you really believe the story the syndicator is telling.
Second, see if there is anything realistic about the deal. For example, a property built in the 1970s or 1980s of 100 units in size is likely to have an expense ratio (operating expenses divided by total income) of 50% or more. If the expense ratio is below 50%, it's an indication that the syndicator may be overly aggressive on either achievable rent growth or on cutting expenses.
Watch the fees as well. A deal that is overloaded with every kind of fee you can think of probably means that the sponsor isn't wiling to rely on performance compensation. Especially at this point in the market, where we are at or near the top of the cycle and the deals are very expensive. Underwriting may be aggressive and the sponsor knows it, so they want to make sure they get paid lots of fees, which they collect no matter how the deal performs.
Watch out for too much leverage. At this point in the market cycle you want to be very conservative, not very aggressive. But the temptation is to be aggressive with debt because it increases the returns to equity investors. Be wary if they are going above 75% leverage, especially if they are doing it with seller financing or some kind of mezzanine debt. It means that the sponsor is trying to financially engineer their way into returns, rather than get there on fundamentals - they've overpaid for the deal, most likely,
I say scrutinizing the heck out of the syndicator is more important than the deal. A poor syndicator can turn a silk purse into a pigs ear in no time and a great syndicator can work the reverse. Check references and the track record; take nothing for granted! All the best!
Originally posted by @Manoj Narayanan :
Hello, I came across an opportunity to participate as an LP in an syndication deal. As an LP what due diligence is required other than the deal details. Should I be seeking any attorney reviews? What else?
You have received some great advice already up there.
I recently wrote a blog post on the subject that tou might find helpful.
Also feel free to shoot me a direct message if you are interested in chatting further.
I'd say there're questions that you have to ask sponsor. Here's a short list of them:
- How long have you been actively engaged in real estate investing?
- How long have you been doing syndications?
- What locations do you invest in?
- Which asset classes do you invest in?
- Do you put any of your own money into your deals?
- Did you ever have a deal go bad? If so, how did you handle it?
- Are you sponsoring any other investments? If so, how many?
- Can you give me the name and contact information of your past clients?
- Do you mind if I speak to them about you?
- How do you structure your deals?
- Check online for complaints about the syndicator.
- Perform a background check on the syndicator.
- Look this syndicator up on social media.
- Try to find some of the syndicator's past or present colleagues and/or employees on your own, and ask their opinion of him.
- Ask for details about a past deal the syndicator had handled.
- When the legal documents for a deal arrive, make sure the legal paperwork is complete and accurate. Check that all documents are there, and that they look professional, and were prepared by a reputable syndication attorney – and not via an online tool.
@Manoj Narayanan only get advice from syndication attorneys that actually make them. That is the first question to ask them.
Thanks for the awesome advice guys!!
The syndicator is Western Wealth Capital. Anyone know of them? They have been in business since 2011 and have done 40+ deals in multifamily concentrated in Arizona. They had another deal couple of months ago thru the investor club that I'm part of and I didn't participate. The strategy is to normalize rents (they are below market), value add and bring the rent up to market avg, and goal of returning capital by 4 years. Their expense ratio at end of year 1 is about 38% and goes down from their and the plan is to return 65% capital by year 2 and 100% by year 4. Possible exit by year 5.
@Manoj Narayanan I think the best thing you can do in addition to the great advice already given is to underwrite 100 deals before doing one. There's always more deals seeking capital. Taking a pause and spending the next 4 to 6 weeks underwriting 100 offerings will equip you with a finger tip feel of what a good deal looks like.