Great Summary on a GP Review of a Syndication
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
7e investments53 Reviews
Great Summary on a GP Review of a Syndication
Most Popular Reply
Investor · Member since 2024 · 19 posts · 51 votes
2ySome investments are difficult to analyze. Others, like this one, are so blatantly bad that the sheer volume of people raising money for them have destroyed the reputation of fund of funds across the entire industry. Everyone should read the entire series of posts on X but to highlight the two largest red flags:
1) They had to raise millions of dollars to fund the operational shortfall of the investment while still falsely claiming to investors a 5% average annual cashflow. That's not cashflow, that's raising investor capital to return investor capital and charging a fee in between.
2) Claiming a low basis of $132k/unit while loading the deal with so many fees and reserves needed to make it not an immediate foreclosure, that the all-in basis is actually $193,952. In other words, the property needs to appreciate 35%+ just for investors to receive their money back. Spoiler: Most real estate was appreciating 3-6% a year during the incredible bull run of 2010-2020.
5 Replies
- Investor · Member since 2024 · 19 posts · 51 votes2y
Some investments are difficult to analyze. Others, like this one, are so blatantly bad that the sheer volume of people raising money for them have destroyed the reputation of fund of funds across the entire industry. Everyone should read the entire series of posts on X but to highlight the two largest red flags:
1) They had to raise millions of dollars to fund the operational shortfall of the investment while still falsely claiming to investors a 5% average annual cashflow. That's not cashflow, that's raising investor capital to return investor capital and charging a fee in between.
2) Claiming a low basis of $132k/unit while loading the deal with so many fees and reserves needed to make it not an immediate foreclosure, that the all-in basis is actually $193,952. In other words, the property needs to appreciate 35%+ just for investors to receive their money back. Spoiler: Most real estate was appreciating 3-6% a year during the incredible bull run of 2010-2020.
- Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes2y
This is a great analysis of any syndication deal.
This looks very similar to many syndicators. It is all about marketing.
It is much easier to talk about being conservative when the sponsor implies that they are CHOOSING to keep millions in reserves or buy a low interest rate cap. But, as noted, the syndicator isn't doing this out of the goodness of their heart. They are doing it because the lender is requiring them to, so might as well spin it into conservatism and positive messaging.
But at the end of the day, the bigger tell to me, as I am learning the hard way, is fees. In this instance, the sponsor and all the various fund of funds will be collectively making $1.65mm the day this deal closes. Not a bad payday, if you ask me.
- Investor · Member since 2024 · 19 posts · 51 votes2y
I'm not sure there are many syndications executing investments with debt funds today and paying 10% of the property's value to buydown the interest rate and claim positive financial leverage.
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes2y
Quote from @Evan Polaski:
This is a great analysis of any syndication deal.
This looks very similar to many syndicators. It is all about marketing.
It is much easier to talk about being conservative when the sponsor implies that they are CHOOSING to keep millions in reserves or buy a low interest rate cap. But, as noted, the syndicator isn't doing this out of the goodness of their heart. They are doing it because the lender is requiring them to, so might as well spin it into conservatism and positive messaging.
But at the end of the day, the bigger tell to me, as I am learning the hard way, is fees. In this instance, the sponsor and all the various fund of funds will be collectively making $1.65mm the day this deal closes. Not a bad payday, if you ask me.
Locking in 4.75% on a bridge with a rate cap is not conservative. All they are doing is pre-paying the interest today, so that their "cash flow" can look better.
- Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes2y
@Todd Dexheimer, agreed. And just to clarify if anyone else is reading this: buying an interest rate cap, while effectively buying down the interest rate is NOT like buying down the rate on your personal mortgage.
A point on your personal mortgage locks in the lower rate for 30 yrs and the mortgage fully amortizes. This can often be a great "investment" if you plan on staying a long time in your house.
An interest rate cap is only good for 3 years, and, specific to this loan, it is interest only. So, they are prepaying interest, even if they sell in 2 years, or if prevailing rates do come down.
At the end of the day, I have said it before and will say it again, EVERY real estate operator I know that has survived for 30+ years and, generally shown continued success is completely against floating rate loans. Yes, there may be a small exposure to floating rate loans, but these are hedged with swaps, not caps, and account for generally less than 20% of the overall debt attributed to assets. They are also primarily owned through Funds so that there are more options with the financing to keep overall exposure low.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.