The Three MOST Important Requirements for Investing in a Syndicated Offering
Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votesThe Three MOST Important Requirements for Investing in a Syndicated Offering
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Stuart UdisPro Member
Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votesAgreed. These are three of the most important things any LP should evaluate before investing. It's equally important to understand how some sponsors work around each of them.
Experience: A common playbook is to take a syndication course, obtain permission to list the coach or mentor as a "strategic advisor," and then prominently display the advisor's transaction history in a way that can leave investors with the impression those deals were completed by the sponsor. Another variation is raising capital for someone else's deal, receiving a small co-GP interest, and then marketing the entire property as part of the sponsor's track record.
Alignment of Interest: Read the PPM carefully. Most investors focus on the waterfall, preferred return, and ownership percentages, but often pay less attention to formation costs, acquisition fees, asset management fees, loan origination fees, development fees, construction management fees, property management fees, and other affiliated-party compensation. By no means am I suggesting a GP shouldn't be paid. In fact, a GP struggling to cover personal expenses can be just as concerning. The key is balance. You want a sponsor whose economics are tied to the success of the investment, not one who is exclusively compensated regardless of the outcome. At the same time, you want the sponsor to be making rational business decisions and not allowing their personal finances sway investment decisions that may not be best for the real estate.
Is the GP actually invested in the deal? In many deals, substantial upfront fees allow the sponsor to recover much of their capital early in the investment. In some cases, the GP's contribution is raised from others as well. Understanding how much of the GP's own money is truly at risk is important.
One additional item I always examine is the loan guarantor. Is it the lead sponsor who is actively involved in day-to-day operations, or a passive co-GP brought in primarily for balance sheet support? Lenders verify liquidity, net worth, creditworthiness, and background. I generally prefer the person driving the business plan and making operational decisions to also be the person standing behind the loan. I also like to examine the debt terms. Strong debt terms are often awarded to borrower's lenders are most comfortable with. Generally speaking, if the lender is comfortable, I am more comfortable.
10 Replies
- 2moJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Agreed with alignment of interest.
when I work with investors we all get paid the same day.. I do not take anything up front and I get paid the same day the investor gets paid.. So my motivation is a pay day the investors motivation is a pay day.. thats alignment of interest.
Now to be fair I understand most syndicators cannot do it this way they have expenses up front they want covered. I have expenses as well but i pay for my expenses out of pocket and if we are successful I get paid back and my profit..
- 2moJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
As for investing in others deals Experience is number one for me personally.
- 2moStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
Agreed. These are three of the most important things any LP should evaluate before investing. It's equally important to understand how some sponsors work around each of them.
Experience: A common playbook is to take a syndication course, obtain permission to list the coach or mentor as a "strategic advisor," and then prominently display the advisor's transaction history in a way that can leave investors with the impression those deals were completed by the sponsor. Another variation is raising capital for someone else's deal, receiving a small co-GP interest, and then marketing the entire property as part of the sponsor's track record.
Alignment of Interest: Read the PPM carefully. Most investors focus on the waterfall, preferred return, and ownership percentages, but often pay less attention to formation costs, acquisition fees, asset management fees, loan origination fees, development fees, construction management fees, property management fees, and other affiliated-party compensation. By no means am I suggesting a GP shouldn't be paid. In fact, a GP struggling to cover personal expenses can be just as concerning. The key is balance. You want a sponsor whose economics are tied to the success of the investment, not one who is exclusively compensated regardless of the outcome. At the same time, you want the sponsor to be making rational business decisions and not allowing their personal finances sway investment decisions that may not be best for the real estate.
Is the GP actually invested in the deal? In many deals, substantial upfront fees allow the sponsor to recover much of their capital early in the investment. In some cases, the GP's contribution is raised from others as well. Understanding how much of the GP's own money is truly at risk is important.
One additional item I always examine is the loan guarantor. Is it the lead sponsor who is actively involved in day-to-day operations, or a passive co-GP brought in primarily for balance sheet support? Lenders verify liquidity, net worth, creditworthiness, and background. I generally prefer the person driving the business plan and making operational decisions to also be the person standing behind the loan. I also like to examine the debt terms. Strong debt terms are often awarded to borrower's lenders are most comfortable with. Generally speaking, if the lender is comfortable, I am more comfortable.
- Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes2moGood information, as usual
Quote from @Stuart Udis:
Agreed. These are three of the most important things any LP should evaluate before investing. It's equally important to understand how some sponsors work around each of them.
Experience: A common playbook is to take a syndication course, obtain permission to list the coach or mentor as a "strategic advisor," and then prominently display the advisor's transaction history in a way that can leave investors with the impression those deals were completed by the sponsor. Another variation is raising capital for someone else's deal, receiving a small co-GP interest, and then marketing the entire property as part of the sponsor's track record.
Alignment of Interest: Read the PPM carefully. Most investors focus on the waterfall, preferred return, and ownership percentages, but often pay less attention to formation costs, acquisition fees, asset management fees, loan origination fees, development fees, construction management fees, property management fees, and other affiliated-party compensation. By no means am I suggesting a GP shouldn't be paid. In fact, a GP struggling to cover personal expenses can be just as concerning. The key is balance. You want a sponsor whose economics are tied to the success of the investment, not one who is exclusively compensated regardless of the outcome. At the same time, you want the sponsor to be making rational business decisions and not allowing their personal finances sway investment decisions that may not be best for the real estate.
Is the GP actually invested in the deal? In many deals, substantial upfront fees allow the sponsor to recover much of their capital early in the investment. In some cases, the GP's contribution is raised from others as well. Understanding how much of the GP's own money is truly at risk is important.
One additional item I always examine is the loan guarantor. Is it the lead sponsor who is actively involved in day-to-day operations, or a passive co-GP brought in primarily for balance sheet support? Lenders verify liquidity, net worth, creditworthiness, and background. I generally prefer the person driving the business plan and making operational decisions to also be the person standing behind the loan. I also like to examine the debt terms. Strong debt terms are often awarded to borrower's lenders are most comfortable with. Generally speaking, if the lender is comfortable, I am more comfortable.
- 2moJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Stuart Udis:
Agreed. These are three of the most important things any LP should evaluate before investing. It's equally important to understand how some sponsors work around each of them.
Experience: A common playbook is to take a syndication course, obtain permission to list the coach or mentor as a "strategic advisor," and then prominently display the advisor's transaction history in a way that can leave investors with the impression those deals were completed by the sponsor. Another variation is raising capital for someone else's deal, receiving a small co-GP interest, and then marketing the entire property as part of the sponsor's track record.
Alignment of Interest: Read the PPM carefully. Most investors focus on the waterfall, preferred return, and ownership percentages, but often pay less attention to formation costs, acquisition fees, asset management fees, loan origination fees, development fees, construction management fees, property management fees, and other affiliated-party compensation. By no means am I suggesting a GP shouldn't be paid. In fact, a GP struggling to cover personal expenses can be just as concerning. The key is balance. You want a sponsor whose economics are tied to the success of the investment, not one who is exclusively compensated regardless of the outcome. At the same time, you want the sponsor to be making rational business decisions and not allowing their personal finances sway investment decisions that may not be best for the real estate.
Is the GP actually invested in the deal? In many deals, substantial upfront fees allow the sponsor to recover much of their capital early in the investment. In some cases, the GP's contribution is raised from others as well. Understanding how much of the GP's own money is truly at risk is important.
One additional item I always examine is the loan guarantor. Is it the lead sponsor who is actively involved in day-to-day operations, or a passive co-GP brought in primarily for balance sheet support? Lenders verify liquidity, net worth, creditworthiness, and background. I generally prefer the person driving the business plan and making operational decisions to also be the person standing behind the loan. I also like to examine the debt terms. Strong debt terms are often awarded to borrower's lenders are most comfortable with. Generally speaking, if the lender is comfortable, I am more comfortable.
by no means an expert here but on these large MF syndications we have seen over the last decade from what I understand the loans are so big that a PG from the sponsor is not required and would not really mean anything in the event of a waterlanding.. I mean you have a 30 mil loan it goes bad what sponsor can just cut a 30 mil check ?
- 2moG. Brian DavisPro MemberInvestor · Hatboro, PA · Member since 2016 · 3k+ posts · 867 votes
I agree with all three. I'd probably put the operator at the top of the list. A great deal can still disappoint with poor execution, while a strong operator can work through the challenges that come up. I also like to see conservative underwriting. If the deal only works under perfect conditions, it's probably not for me. I want to see some margin for error.
- 2moStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
@Jay Hinrichs Most commercial real estate lenders typically look for liquidity equal to roughly 10% of the loan amount, separate and apart from any down payment or capital being contributed to the project. In practice, many guarantors are likely relying on the same liquidity across multiple projects and lenders, but the 10% benchmark remains a commonly used underwriting standard.
As for your $30 million example, it would take an extraordinary event for collateral securing a $30 million loan to have no value. The realistic risk is not the collateral becoming worthless, but rather a decline in value that impairs equity and produces losses.
Another consideration is that many larger syndications can operate with lower leverage debt because they have access to less expensive and more conservative LP capital sources. I believe a common theme in the syndication failures highlighted in these forums are instances where sponsors raising capital from a specific category of retail investors often face pressure to project higher returns, which can push them toward more aggressive leverage and debt structures. As a result, the debt terms are sometimes driven as much by the need to meet investor return expectation. I would call this more of a new age syndication phenomenon brought on by internet notoriety and social media. I truthfully do not believe many of these current syndicators could have gotten in front of so many prospective LP's before internet and social media provided the platform that now exists.- 2moJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Stuart Udis:
@Jay Hinrichs Most commercial real estate lenders typically look for liquidity equal to roughly 10% of the loan amount, separate and apart from any down payment or capital being contributed to the project. In practice, many guarantors are likely relying on the same liquidity across multiple projects and lenders, but the 10% benchmark remains a commonly used underwriting standard.
As for your $30 million example, it would take an extraordinary event for collateral securing a $30 million loan to have no value. The realistic risk is not the collateral becoming worthless, but rather a decline in value that impairs equity and produces losses.
Another consideration is that many larger syndications can operate with lower leverage debt because they have access to less expensive and more conservative LP capital sources. I believe a common theme in the syndication failures highlighted in these forums are instances where sponsors raising capital from a specific category of retail investors often face pressure to project higher returns, which can push them toward more aggressive leverage and debt structures. As a result, the debt terms are sometimes driven as much by the need to meet investor return expectation. I would call this more of a new age syndication phenomenon brought on by internet notoriety and social media. I truthfully do not believe many of these current syndicators could have gotten in front of so many prospective LP's before internet and social media provided the platform that now exists.
I truthfully do not believe many of these current syndicators could
have gotten in front of so many prospective LP's before internet and
social media provided the platform that now exists.AMEN
- 2moMark RobertsonPro MemberInvestor · Salisbury, NC · Member since 2014 · 314 posts · 386 votes
I agree with experience, alignment, and meaningful sponsor capital. I would add that each needs to be verified carefully.
“Experience” should mean full-cycle experience in the specific asset class and strategy—not simply acquisitions completed or capital raised. I want to see original projections beside realized net results, including deals that underperformed.
“Alignment” requires examining the entire economic structure. A sponsor can invest personal capital and still earn significant acquisition, financing, construction, or management fees before LPs receive meaningful returns. The waterfall and fee stack matter as much as the advertised co-investment.
I also prioritize conservative debt, transparent reporting, capital-call and dilution provisions, key-person protections, and references from investors who experienced a difficult deal with the sponsor.
The best diligence question may be: when a deal fell behind plan, how quickly did the sponsor disclose it, what did they do, and how were LP interests treated?
- 2moMark RobertsonPro MemberInvestor · Salisbury, NC · Member since 2014 · 314 posts · 386 votes
Those are all high on my list. I’d probably add a fourth category that has become increasingly important to me: the capital structure and debt.
A very good operator can still get trapped by a capital structure with too little margin for error.
I want to know the loan maturity, extension options and conditions, fixed versus floating rate exposure, rate-cap requirements, DSCR/covenants, reserve levels and what happens if the business plan takes 12–24 months longer than expected.
I'd also ask the sponsor to walk through the downside scenario numerically. Not just "we believe the market will recover," but: What occupancy or NOI level creates a problem? How much liquidity is available? At what point would additional equity be required? If there is a capital call, is it mandatory, what happens to investors who don't participate, and where does the new money sit in the capital stack?
Experience, alignment and GP co-investment all matter. I just want to make sure the financing gives those advantages enough time to actually matter.
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