False Beliefs With Passive Investors

[Nick Love]

Good Afternoon,

I am trying to gain some information about the audience of passive investors and what they think about when they think about investing passively in apartment syndications. What are some false beliefs or fears that you would have as a passive investor before investing with a syndication? 

Also, what woud be reasons that you would not choose to invest in apartment syndications and possible choose to invest into other securities?

Thanks,

Nick

[Mike Dymski]

False beliefs:

• It's passive.  In reality, it can take a year or two and analysis on 50+ offerings and sponsors to gain knowledge and define your criteria.
• Proforma results and preferred returns are almost guaranteed.  In reality, offering materials are designed to sell and results can vary dramatically by sponsor and property.
• LP and GP interests are aligned when the sponsor says so.  I have vetted countless offerings where sponsors pitch alignment yet the structure tells the truth.
• "10 basis point increase in exit cap per year is conservative".  Baloney.  It may be a good assumption but it's not conservative.
• Sponsor having a puny amount of money in the deal matters.  In reality, a sponsor rolling their small acquisition fee into a $25 million deal is irrelevant.  I can't argue with an LP having this in their criteria though...it's a fair requirement.

Reasons for not investing:

• Sponsor lack of track record
• Sponsor lack of candor or consistency
• Misaligned structure/interests
• Poor location
• Aggressive debt
• Low cash flow
• Concern over management experience and execution
• Aggressive modeling assumptions
• Pay too much
• Better alternative in other asset classes