What I Want to Know BEFORE Performing Due Diligence

Question

What I Want to Know BEFORE Investing in a Passive Investment

Before I invest in SOMEONE ELSE’S deal, I want to know five things even BEFORE I analyze the financial data of the investment itself

• 1. Is the investment offering compliant with SEC Reg D Offerings?  If it isn’t, I’d only invest if I have personal experience with the sponsor, or if I’m offered active participation.
• 2. Does the sponsor/manager/GP have a VERIFIABLE track record of success, both in real estate investments in general, and in the subject investment type in particular?
• 3. Does the sponsor have a significant amount of their own capital invested in the deal?
• 4. Are there environmental, legal, ethical, or regulatory concerns with the subject property?
• 5. What is the “backstory” on the subject property, ownership, etc?

1. Is the investment offering compliant with SEC Reg D Offerings?  If it isn’t, I’d only invest if I have personal experience with the sponsor, or if I’m offered active participation.

2. Does the sponsor/manager/GP have a VERIFIABLE track record of success, both in real estate investments in general, and in the subject investment type in particular?

3. Does the sponsor have a significant amount of their own capital invested in the deal?

4. Are there environmental, legal, ethical, or regulatory concerns with the subject property?

5. What is the “backstory” on the subject property, ownership, etc?

Back when I first started investing in limited partnerships, I’d spend three days gathering and analyzing historical financials, projections, marketing material, reading appraisals and feasibility studies and visiting the subject property.  Only after the property passed all this analysis did I found out (about 75% of the time) that the sponsor had little experience or there were title issues, or that environmental was considered high risk, or that the offering was in some way “deficient”.  I then realized I was operating “backwards”.

For those who do invest in passive investments, how do you qualify your interest in the deal?

Ronald Rohde · Answer

Property replacement market rent. Operator balance sheet and are they committed to working hard to save the deal if it goes sideways?

Kasing Ng · Answer

First of all, I am a financial analyst and tax modeler rather than a passive LP investor, but filtering the sponsor and legal structure before analyzing financial data is the correct sequence.

Checking SEC compliance, track record, and sponsor co investment first prevents wasted time on unproven operators. Track record and financial alignment are especially critical because they dictate whether the operating assumptions in the model are realistic.

Once those checks pass, the final review before deep underwriting involves verifying the tax structure, particularly how exit liabilities like depreciation recapture are handled. Vetting the sponsor first is necessary because reliable numbers require a reliable operator.

Don Konipol · Answer

Ronald, do you invest in or legally represent either GPs or LPs?   You seem to have a lot more “syndication savvy than the average attorney!

Don Konipol · Answer

Thank you for your input. That’s a VALUABLE piece of advice about verifying tax structure.  Especially when expensing capital investment can be used to create large losses for investors - which will be totally wasted to an investor investing thru retirement programs.

What I Want to Know BEFORE Performing Due Diligence

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