All Forum Posts by: Duke Giordano

Hey Folks,

I was curious if you guys have found ways online to obtain average market/city specific cap rates for Different asset classes and types such as Multi-Family (Class A,B,C), Mobile Home, Self Storage, Industrial.  Obviously, the most accurate way is to contact brokers in that area, but since I am an LP i dont have broker connections and it is mainly used so I can cross check sponsor assumptions in a pitch deck just to asses ball park.

Thanks in Advance,

Duke

Sounds like they are running into hard times, always seems like their solvency was a bit of a question and whether they were truly profitable.

Funds vs Individual Syndications from an LP perspective:

Funds offer: more diversity, typically longer hold time, In some cases multiple state K1's which can add to CPA costs, less ability to vet individual deals, in some cases money can be tied up without being deployed or may be deployed into subpar investments because of pressure from LP's to deploy/get a return on money.  Cost Seg/Bonus Depreciation less predictable and more complicated.

Individual Syndication Deals: Allows single deal evaluation, typically shorter hold time, may be easier to turnover money and deploy capitol into new deals, single K1 typically thus more simple taxes, may need more upfront due diligence since need to vet both deal and sponsor.  Cost Seg/Bonus Depreciation more simple/predictable.

Personally, as an LP interested in long term upside I prefer single deals.  I also prefer them because as someone who uses mostly post tax dollars (not SDIRA) I enjoy the tax benefits of Cost Seg and Bonus Dep.  It kinda frustrates me when good sponsors switch to fund models.  An interesting Hybrid approach would be if sponsors did "State Specific Funds" to avoid the multiple K1 issues.  Such as a Fla Fund, and Arizona Fund, a Georgia Fund, or South Carolina Fund etc.  Obviously the GP would need to have expertise and a team in these regions, not just to willy nilly throw several state funds out there.  As an LP this would make it more enticing for funds as I hate multiple K1's from a fund if properties in several states.  But also would want a deal with heavy Cost Seg/Bonus depreciation component.

@Greg Scott

Good point Greg, thanks for your reply.

I tend to agree with you.  As someone who is interested more in long term upside (Class B) when investing in syndication deals, it seems that having a competing LP group (Class A) shifts the position up the capitol stack for class B and effects overall deal flow.

Overall its seems that a two class LP share (Class A/B) shifts cash flow and thus returns to later in the deal or even back to a liquidation point such as a Refi or Sale before getting much of the return for Class B LP investors.  I think this functions to increase the risk of the deal for Class B.  I was trying to see this quantitatively to see how it plays out as well.

Thanks again.

Hey Guys,

I have been looking for a detailed calculator or analysis on comparing a single tier LP, vs two-tier Lp returns and cannot seem to find.  I was trying to quantitatively evaluate as more syndications in MF investments are using Class A and B shares how this effects return both in the timing of returns and overall returns.  Specifically I am trying to understand why more syndicators are going to this option and the effect it has on the LP Class B investor.  In addition, how the risk profile for Class B changes.

1. For example, how does a deal compare as the percentage of class A investors increase or changes that is offered in a deal.  Meaning say one deal offers 75% class B and a max 25% class A vs another deals offering a 50% class A/ and 50% class B structure. How does this effect the timing and overall returns for class B by changing the max percentage of class A LP's.

2. In a second scenario, can you compare once again in respect to Class B investors (upside investor), the same deal that offers either the classic one class LP investment class vs the two tiered class A/B LP investor class assuming say a 10% Pref class A (no upside)  7% class B (Upside potential) in the split deal vs straight 8% pref for all LP's in the classic deal.  How does this effect Class B returns and risk profile?

3. As a separate question in relation debt, specifically to bridge and mezzanine debt, can you qualitatively analyze a deal that has say 10% mezzanine debt or bridge debt and how that effects the deal from a LP standpoint? Does it mainly just increase deal risk? For example say the deal financing has 65% LTV, with 10 mezzanine or bridge debt on top for a total 75% LTV.

I am curious for those LP's looking for upside how they view these two-tiered LP deals, and how they analyze.

Thanks

Duke

@Tim Bratz

Tim,

Would you care to share how you adjusted your underwriting assumptions Pre- and Post COVID on the three deals you mentioned (2 Multi-Family, 1 Self Storage)?  

Did you change any variables in relation to specific components of the deals you mentioned (MF and Self Storage) such as your:

1. Value Add plan: timing of value add, amount per unit in Multi-family deals

2. Rent growth assumption in your deals

3. Debt structure assumption/type: LTV, DSCR etc.

4. Reserve requirements

5. Occupancy assumptions -what break even occupancy rate were you underwriting?

6. Planned Hold time

7. Are you underwriting in any renter concessions?

Would be great to learn from your experience on these specific deals you mentioned.

Thanks in advance

7. Are you telling LP's to plan on now cash flow/preferred return year one if you offer a Pref?

For those operators who feel there is nothing to worry about from a multi-family standpoint, and all is well in the MF world you may truly be right.  I actually hope you are right...

However, if you could please answer me then a few fundamental questions:

1. Why is it that you think the non-agency debt and lending has dried up?  Hard money loans are more difficult to come by and rates are inflated?

2. Why is it that agency debt now requires 9-12 month reserves, debt to income requirements more strict?

3. Why is it that some operators have frozen LP distributions or decreased them at this time (I know there are some GP who still are distributing at least for now, I am simply stating that many are not)?

My answer to my own question comes down to RISK.  Its that simple, and the fact of the matter is that risk is not currently priced into deals as some people still living in the Pre-COVID world.  Thus, one of two things need to happen for the deal to work.  Either sellers will eventually need to price in the aforementioned RISK, or that perception of that risk will eventually go away.  As of now, my questions above outline why it is still very much here.

Agree, as an LP I am happy to pull the trigger on a deal, if the numbers are right...  However, the numbers today are not what they were yesterday.  The big issue is there is no accurate numbers for rent comps over the next 6 months, they just dont exist because it is not an accurate comp in reality to look Pre-COVID.  Although April looked ok, it really has not given a chance for the economic effect to take hold, and many more people are prepared for short term (1-2 month) job loss or income loss than 3-6 months of such.  This leads to an inaccuracy and a guessing component of underwriting rent prices for which it is all based.  The cost for that inaccuracy in the underwriting for me as an LP I have outlined below acceptable parameters.  Assuming it has proper underwriting adjustment from pre to Post-COVID variables.  

Off the top of my head I would like to see the following in the "New World Underwriting" and looking for:

- Operator experience, reputation and character (always the most important at any time)

- No class C

- calculating in worse occupancy rate

- acceptable cap rate reversion

- property expense ration 5-10% less than what I was looking for (Not much more than 45% now)

- Break Even occupancy closer to 55-60%

- better DSCR, LTV

- Better reserves

- No Bridge debt (or at least bridge debt that converts to fixed rate)

- no planned rent increases for 1 year or very little

- Value add on hold for 1 year

- Area employment diversity and not dominated by toursim, hotels, or one industry

Admittedly, these are high standards and I am aware it may leave me on the sidelines for some deals but I am ok with that, I can be patient.

@Brian Burke thank you for your thoughtful and insightful reply as always.

So ti seems "Bad Debt" is basically rent that is not paid for that month, that was expected.  I realize this varies by market, geography etc. but what would you say an average is for B-class properties (2-3%) and has this changed post-COVID?

Could "Bad Debt" also be considered "economic vacancy"?

Thanks again as always