Posted over 3 years ago

The Best Questions To Ask Syndicators When Evaluating Deals

I’ve invested in several syndications and have also co-syndicated many deals. These are the questions I ask every syndicator. They are also the questions that are asked of me by investors on a routine basis. The answers to these questions should be found either in the Investment Summary, on the Investment Call, or by speaking personally with the syndicator. This list may not be exhaustive, but a good list to keep handy when evaluating your next syndication.

Questions about the market

1- What is the justification for why this market makes sense? Is it a good area? Class A, B, or C area? What are the crime statistics? Is the area improving or in decline? Does the syndicator provide a compelling investing story for both the market and submarket?

2- What are the comparable, current and projected rents and thesis on why rents can be increased?

3- What are the projected jobs and population numbers over the hold period? Are there employers moving into the area? What is the probable effect on housing demand?

Questions about the team

4- What is the experience level of the team running this deal? Do they have a website with bios of each team member and their experience?

5- How many deals has this team done? Have they had any bad deals? Are they conservative in their underwriting?

6- Has this team seen a full real estate cycle? Are they also investing in the deal personally?

7- How many exits has this team had? What have been the results? What is the Average Projected Return for the deal? What is the projected IRR and how does this IRR compare with other opportunities I have before me?

8- How quickly will this deal start paying distributions? (I want to see the first distribution go out within 60-90 days of closing.)

9- How often will they communicate with investors?

10 – Are there any pending lawsuits or complaints with this syndicator? (Hint: Check SEC)

Questions about the deal

11- Is the deal a standard 8% Preferred Return with a 70/30 split? If not, is the investor return a conservative number above 17%?

12- Again back to rents. This is very important. What are the rent rates of similar properties in the area that have been renovated. How likely is it that the operator will achieve targeted rents?

13- Is the cap rate at or better than market?

14 - What is the exit cap rate? Does it take into account rising interest rates? Is there a rate-sensitivity analysis provided with the exit projection?

15 - What is the Equity Multiple over the hold period? (I like seeing 2.0X over 5 years generally)

16- What is the possibility of a capital call? Does the syndicator have a history of capital calls? Is there sufficient capital in the deal to cover renovations and upgrades?

17- What are the finance terms? Is there more than a 25% down payment? Is the loan rate competitive and fixed? (I’d be wary of any hard money loan deal or variable interest rate deal.)

18- Do the principals have key man insurance? What happens if something tragic happens to the key player on the GP side of the deal? It’s rare, but I want to know the company is being careful and are thinking about this.

19- How likely is it that this deal will provide a liquidity event in year 2 or 3? (A liquidity event or “cash-out”, is when the syndicator gets an appraisal on the deal after the enhancements and renovations are made and uses that higher valuation to either refinance the loan or get a supplemental loan. This extra cash is returned to investors for other investments. We like it when we get money back faster and syndicators try to achieve this for us.

In summary, the questions offered here provide a framework that can be useful in evaluating syndications. I find that having a checklist, or a system allows me to make sure I'm not missing anything big. Are there any questions not on this list that you think are important? Let me know. Thanks and happy investing!

Comments (5)

  1. Great Article. These questions are helpful for me as a Syndicator to make sure I am positioned to answer for every investor. Thanks for your contribution here. I am also looking to syndicate in San Antonio. 

  2. Hi Dave, I think I follow you. If you're asking if there are cases when an investor, i.e. limited partner, can sue a syndicator, then the answer is yes. Especially in the case of fraud. A poorly performing syndicator, or a market change resulting in the deal going bad are not grounds. Disclaimer here: I'm not a lawyer, nor do I pretend to be one on BP or anywhere else. Best to refer legal questions to the myriad at attorneys on this site to get more specifics around my commentary here. Thanks Dave!

  3. Great article! How does one check the SEC site for lawsuits or complaints against a company? If there are complaints/lawsuits do they show up in a "Company Filings" search?

    1. Eric, The SEC has a very helpful and somewhat user friendly website at Lot's of useful information there!

    2. PPM carefully designed with indemnification clauses, explaining  that return promised is not contract, poor performance or timely exit strategy syndicator projecting for that deal never happen to that level,downtrend in property value  debt owe is greater than there note,limilted partner /investors can't sue for damages to recover there monies .any feedback on that