How to Evaluate a Syndication or Joint Venture Opportunity

There are benefits to passively investing in larger real estate deals, as described here, so individuals should consider investing. However, passive investors should not think that every joint venture or syndication was created equal, and must still do some due diligence on, not only the deal, but the sponsor.

As a threshold matter, it will be obvious to many investors to consider the return on investment. A sponsor – the individual putting the deal together and operating it – should be able to provide you with a clear business plan illustrating a pro forma return on investment and cash on cash return. Aside from that, here are some less obvious things to consider when evaluating a joint venture or syndication opportunity:

1. 1. The Sponsor

Perhaps the most important piece of due diligence by an investor is due diligence on the sponsor. The sponsor is the individual personally responsible for the deal, and is the individual that will be managing the day-to-day. A passive investor should trust a sponsor because the sponsor will be responsible for the investor’s capital.

1. 2. Timeline and Exit Strategy

Every project has a different timeline. Some are 1-year holds while other deals are 10-12 year olds, with everything in between. Understand your goals, when you may need access to the capital you plan to invest, and invest accordingly.

1. 3. The Business Plan

Ask questions about the sponsor’s business plan and understand the strategy. Is the plan to add value to the property and then refinance? Is the plan to organically increase rents and then sell in 5-7 years? Will the sponsor be utilizing professional property management that has executed this business plan previously?

1. 4. Fees

Many sponsors will charge passive investors high fees in exchange for acquiring the deal, and additional fees for managing the asset. Be sure to understand whether fees are being charged, and the amount of those fees.

While investing in a joint venture or syndication can be passive, an investor should consider doing some due diligence at the outset to ensure it is the right opportunity at the right time. Understanding the foregoing, and all the variables that come with deal, will help ensure a smooth relationship between all involved.