Evaluating a Syndication Opportunity

17 Replies

Hi everyone, I'm evaluating an opportunity to participated in a syndication for a mid-sized apartment complex as a limited partner.  Any thoughts or advice on what to focus on or questions to ask?  Based on the materials, it looks like good opportunity but I would love to hear how others evaluate syndication deals.

Thank you!

Steve

Take a look at the property itself and the market and see if it’s something you are interested in. Then take an even closer look into the syndicator and their last deals. If they made good returns for investors in the past they probably know what they are doing.

Hey @Steve Wilson I'm right down the street from you in Barrington. I'm investing on the south side of Chicago and also in syndication deals. I'm happy to be a resource for you and/or meet up at some point. I have a group of about 8 multifamily investors that email and meet up semi-regularly. This group is actively investing in MF, from 10 to 100+ units and also has a wealth of knowledge if you're just looking to invest passively.

Good Luck.

@Steve Wilson Good question, very important to vet the syndicator (if they're new to you), the market, and the property itself. You already received a great list from @David Thompson

Here's an abbreviated list from me:

  1. How long have you been actively engaged in real estate investing?
  2. How long have you been doing syndications?
  3. What locations do you invest in?
  4. Which asset classes do you invest in?
  5. Do you put any of your own money into your deals?
  6. Did you ever have a deal go bad? If so, how did you handle it?
  7. Are you sponsoring any other investments? If so, how many?
  8. Can you give me the name and contact information of your past clients?
  9. Do you mind if I speak to them about you?
  10. How do you structure your deals?

@Steve Wilson , Every investor has their own process. 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 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.

I recommend taking the lists above, defining your criteria, and analyzing many offerings before investing.  All offerings will look good until you know what to look for.

@Steve Wilson the sponsor is a big thing but so is the deal and numbers.

Nothing in the executive summary will tell you this. You need the p and Ls and rent rolls to determine that.

One big thing that is being manipulated is the reversion cap rate to get that juicy proforma returns us LP investors look at first.

Originally posted by @Steve Wilson :

Hi everyone, I'm evaluating an opportunity to participated in a syndication for a mid-sized apartment complex as a limited partner.  Any thoughts or advice on what to focus on or questions to ask?  Based on the materials, it looks like good opportunity but I would love to hear how others evaluate syndication deals.

Thank you!

Steve

 For full disclosure, I am personally in this space, before being in the space, I had a chance to review hundreds if not thousands of syndications and varying models of such.

Critical items:

  1. Minimum Investment Amount
  2. Accredited or Non-accredited or (Mix)
  3. Sponsor Track Record
  4. Critical impact items that will cause the value to increase
  5. Sponsor Fees
  6. Sponsor Equity Participation (Always like to see skin in the game)
  7. Cost of capital and capital (capital stack structure)
  8. IRR (will predict timeline so time is X)
  9. Cash Flow
  10. Cash on Cash %

Hope this helps a little bit

Originally posted by @Christopher Lombardi :

Take a look at the property itself and the market and see if it’s something you are interested in. Then take an even closer look into the syndicator and their last deals. If they made good returns for investors in the past they probably know what they are doing.

 truth, start with homebase

@Steve Wilson

Hey Steve,

focus on the sponsors and make sure they are credible and have a track record. I would also evaluate the deal as if you were investing in it yourself. Make sure you like the market, the deal has value adds, the implementation of the strategy can be accomplished and you are comfortable with their "conservative" underwriting.

Would you buy the deal by yourself? If the answer is yes, then I would be comfortable investing as long as I like and trust the sponsor.

Gino

@Gino Barbaro- That's good, straightforward advice that's easy to follow.  Thank you for taking the time to respond.

@Steven Gesis - Thank you for responding.  Can you provide insight on some of your bullet items?  For example, what is a "good" minimum investment amount?  What do you think are acceptable sponsor fees?  Again, I appreciate your time and insight.

@Lane Kawaoka - Interesting - what do you feel is a realistic Cap Rate?  Obviously, the biggest single cash flow item is the sale of the property after "x' years, so it's a very important assumption.  Thanks for taking the time to respond!

I've been overwhelmed with the number of and quality of responses.  I really do appreciate all the feedback.

Steve