All Forum Posts by: Duke Giordano

Hello All,

I am curious for some perspective from both the GP side (How you are looking at future deals) as well as, the LP side in what you are also looking for from a criteria standpoint in a future upcoming deal both the short and Mid-term over the next 3-6 months range in relations to specific underwriting criteria, and return criteria and how it has changed post COVID.

For example some deal criteria that may be different for me due to COVID from an underwriting and return standpoint:

Property Class: Looking more at class B now vs Class A or C

Property Expense Ratio: Probably looking more in the 40-45% as opposed to 50-55%.

Cash Flow: Want to see underwriting that is cash flow focused as opposed to more upside.  Not sure how this would be able to be evaluated except the section of a PPM that looks at hypothetical investment.

Rent Increase Assumption: this will be effected when putting off value add plays, maybe look at 0-1% now as opposed to 2-3%.

Renovation per unit: was looking at 3-8 K per unit, maybe now looking at more like 3-5K per unit.

Break Even Occupancy: was looking at 65-70%, now prefer to see closer to 50-60%

Reversion Cap Rate: Previous was looking at 0.5-1.0 over initial, now looking more at 1.0-1.5x

Loan to Value: Prior Criteria was <65-75%; now lloking more for 60-65%.  Also would be much more hesitant with Bridge debt at the moment.

Reserves for GP: was looking for 3-6 months of Debt+Expenses, now probably looking 6-9 months or 6-12 months (Debt+Expenses) as reserves.

Return criteria (Pref, IRR, Eq Multiple): not sure how this will be effected but still looking for similar number 7-8 Pref, 14-16 IRR, 1.9-2.1 Eq Multiple. Numbers need to make sense with meeting above criteria (more conservative underwriting).

GP Fees: Not sure if this situation will change GP Fee structure or how I look at alignment of interest.  Such as acquisition fee, Asset Mgmt fee etc.?

GP Skin in the game: I know this has been debated quite a bit.  Not sure if people (LP's) are looking at different criteria now then in the past?

Thanks in advance for your time and discussion.

@Ivan Barratt

I hear what your saying is that the classA-B+ assets should be able to weather the storm, in that people do need a place to live in but the question is whether for an LP looking at investments opportunities for a long perspective (3-7 years) is the time really now to get the best deals?  

That is the true question, in that why would someone lock up capitol for a deal now that will be a better deal 6-12 months from now. At that time, vacancy rate may be worse, NOI will be worse, rent comps will be worse. All of those paremters will have a resultant effect on sale price, and cap rate. I agree in the MF space class A/B are most likely to weather the storm, but not sure the current value is there as most people/sellers are pricing things based on the past, which is not the current nor the future. Once prices seem to reflect the current environment then I have no problem deploying powder, just not there yet.

In my opinion, some of the overarching key components to a good syndication deal relate to the fact that money is made on purchase, and hold time (ties up my money).  In this environment, the purchase price at the moment has not yet reflected the true risk/value in this market so harder to make the overall deal a good deal.  When one needs to lock up money for a period of time, thus leading to an opportunity cost of cash one really needs to be sure the asset is priced at a value.  I dont know that there yet to reflect current market conditions...

I agree with above.  "Current deals are not pricing in future risk", this is really the key.  As much as it would be nice to keep doing deals and finding bargains in any environment, this is not realistic as it's difficult as a GP to know how to underwrite accurately in this environment.  Underwriting is the basis for eveything.

Remember, the bedrock of underwriting is assumptions on previous performance/events in the past. For example, assuming a certain worst case vacancy rate in previous recessions is what every underwriting does, but is this really accurate now? Another example, assuming current rent rates compared to current comps (is this really accurate now). Assumptions on economic vacancy, is this really accurate when people have no penalty for not paying their rent? Assuming that a value add will raise rent then NOI, but are people really going to put capitol in to value add and raise rent right now? If not how are you adding value, and increasing NOI? Are GP underwriting common area improvements such as Gym, pool, etc. to increase income when nobody is congregating. Were these changes priced into underwriting. In sum, how can you increase rents at this time in any way with no value add, no common area improvement, no clear improvement to management inefficiency can be assumed in this environment.

Thus, I agree with most that an LP right now should really be on the sidelines for a bit, if even to get a better feel for where deals are going, vacancy issues, rent price movement and what the new normal to be.  It is likely that an LP would not be collecting distributions for at least 6 months to a year anyway as many syndicators will consider freezing distributions in the near term (I realize not all GP have done this yet, but we are not that deep into this).  Does anybody really believe a deal today will be better than a deal 6-12 months from now?  Nobody (not even the best syndicators) know that answer right now in reality, not yet...

Interesting @Brian Burke, how do you see what California is doing currently effecting things there in the short and long term?  Values have been way overpriced in CA for some time, some areas more than others but now it seems nobody will want to buy and most will just stay renters when the buy/rent cost ratio is what it is there.

@Joe Splitrock.  Joe, when do you think we will see the deal terms respond?  When will you be looking more aggressively?

Hey Guys,

Thanks for the insights you have all provided, on this new horizon and potential downturn. As a LP investor in syndication deals across asset classes, I am curios what your thoughts are in relation to what specific parameters in the future I should be paying particular attention to to know when deals start to get better? My guess is it may take some time to for the effects we are seeing today such as "eviction moratoriums, rent loss, increased economic vacancy, decreased NOI, and then decreased property value start to effect deals and parameters presented to an LP from a syndicator. In addition, as everyone has stated, there is also going to be a supply and demand effect, in that they will be less cash, or capitol available to syndicators so improved deal parameters should then follow.

1. What parameters as an LP should we pay attention to to know when deals are getting sweater? Cap rate change, Pref change, IRR, Equity multiple, Hold time?

2. Are there any variables that would be more indicative as to when we are getting the 2021 price on a deal, and not 2 months ago's price as this no longer exists?

3. Are there particular asset classes, you think may have advantages or disadvantages in this market?  Multi-family as typically been resistent in a downturn, but nobody could have anticipated this degree of job loss, federal eviction regulations etc so I am not sure if in the short term (1-2 yrs) in particular MF will be recession resistent.  Obvious Office, and hospitality is going to take a hit with remote work, people not inclined to travel.  Senior housing will take a hit, as if COVID gets into one of these places, the economic decimation will be difficult to overcome.  Student housing will take a hit, as nobod is at college, at who knows with the new normal of a campus will be, once again at least in the short term so this asset class will also take a hit.  Maybe self-sorage, mobile home are better positioned.  Thoughts?

Thanks for input guys.  I think the RE market moves slower than the equities so I am curios when deal dynamics will change and become more favorable as cash dries up.  

Whats your thoughts how current market dynamics will effect deal flow, Pref, IRR etc. When do you think we will start to see deal parameters/dynamics change in the syndication space?

Hey Jennifer,

Sat on the sidelines for a bit.  At his point earmarking 50% for Dollar cost averaging into market on drops and 50 syndication deals.  Question is when the syndication deal metrics will start to change as cash dries up.

Thanks all @Brian Burke, @Mike Dymski, @Roni E., @Chris Coleman.

I agree, seems partitioning IRR is becoming more important to take into consideration as the market matures for conservative investors. I like to see a few conservative numbers, or one strong conservative variable such as a cash flow heavy partitioned IRR compared to market partition IRR or possibly a very low LTV (60% or so) to weather any impending storms...

Hey All,

When investing as a limited partner, whats your thoughts on looking at a Partitioned IRR to better evaluate return that is based on cas flow vs sale? What is a typical breakdown in most syndication deals for cash flow vs sale proceeds and contribution to IRR? From what I have seen most are in the range of 70-85% Sale Proceeds and 15-30% cash flow.

Seems like safer syndication deals are more cash flow heavy, but also have less upside.