Question 1

What is the Sponsors track record?

Accepted Answer

The answer to this question will vary based on the sponsor — each has its own history and business structure, and thus, its own track record. That being said, we only partner with what we firmly believe to be top-notch sponsors in their niches, who hold high values, focus first and foremost on Limited Partners (LPs) (i.e., capital preservation and downside protection), and have a history of strong performance.

Question 2

Does the Sponsor invest in their own deals / why are they investing such a small amount?

Accepted Answer

To put it simply, yes. Sponsors will invest alongside LPs in their own deals to show alignment, not to mention they are also interested in the strong returns they are projecting. As for small investment amounts, some of our sponsors’ annual deal flow is very strong. They’re not only doing one or two deals a year, like most individual investors, they might be doing 5 or 10! $50K invested in five or 10 different deals per year equates to $250-500K over the year! That’s not exactly a small amount. Another aspect to consider is that many sponsors are guarantors on the secured loan for the property, thus facilitating the need for a liquid personal balance sheet.

Question 3

How is the deal structured and are they allowing non-accredited investors in?

Accepted Answer

The answer to this question varies. But, more often than not, syndicated deals are structured as 506(b) under SEC Regulation D with no spots for non-accredited/sophisticated investors.

Question 4

What is the hold strategy and how long can I expect to be in this investment?

Accepted Answer

A typical hold strategy is 3-7 years long. Most sponsors have a clause in their legal docs that allows for a longer hold period (say, 100 years). The reason it is so exaggerated is so that we are at no point forced to sell via outside factors. Our goal is to optimize value, which allows us to hold through a down market and wait until the market has recovered.
 I advise that an investment in our deals be considered an illiquid investment. That being said, we operate in good faith and will work with LPs to try and find a solution if they need to get out of the investment due to a particular life event. However, there are no guarantees.

Question 5

How is the deal structured in terms of profit sharing with the LP & GP?

Accepted Answer

All of our sponsors structure their deals as a waterfall. The first “hurdle” in the waterfall is the 4-8% preferred return (Pref), where LPs receive 100% of profits until they reach a 4-8% return. After this hurdle, most of our deals are structured at a 70/30 split (you may see different splits with other sponsors), where all profits after the 8% Pref are split between 70% for the LPs and 30% for the General Partner (GP). You will sometimes see a second IRR hurdle, where after XX% IRR (typically 15-18%), the split goes to 60/40 or 50/50. If this information adds some confusion, I recommend concentrating on the projected returns (see A7) as they are more easily understood and, by nature, have the waterfall structure built in.
 This information will be laid out in detail and readily available in the investment summary.

Question 6

What are the common fees and how does the Sponsor make their money?

Accepted Answer

First and foremost, all fees are separate from return projections. What that means is that fees will have no impact on the return projects you will see in any of our deal decks — the LPs are not paying any fees “out of pocket.” That being said, sponsors most often make their money in three ways: (1) the acquisition fee (1-3% of the purchase price), which is paid at close and covers all costs associated with finding and putting the property under contract; (2) the asset management fee (1-3% of monthly revenues), which covers costs associated with executing the business plan, overseeing the property management company and construction management company, identifying and implementing value-add strategies, improving operational efficiencies, etc.; (3) the equity split of profits after the Pref — the most common case here is 70/30 (70% for the LPs and 30% for the GP), but you may also see 60/40, 80/20, etc.

Question 7

What are the projected returns?

Accepted Answer

Typical projected returns metrics are as follows:
Preferred return (pref): 8% (LPs take 100% of profit until they reach an 8% CoC)
Internal rate of return (IRR): 16-22% (a time sensitive rate at which your money grows, annually, over the life of the project)
Cash-on-cash (CoC): 8-12% (a rate of return that determines the cash income on, or in proportion to, the cash invested, measured annually)
Equity multiple: 1.7-2.3x (on a $100K investment, LPs earn $170-$230K, including return of initial investment)
That said, all of our Sponsors consistently exceed projected returns, made possible by our conservative underwriting.

Question 8

What is the minimum investment?

Accepted Answer

What is the typical minimum investment?
$50,000 with increments of $5,000

Question 9

Should I invest all of the capital I’m looking to put to work in to one deal or spread it across multiple?

Accepted Answer

Spread your capital across several. The key to a strong investment portfolio is diversification. The beauty of our strategic partnerships is that we are able to offer opportunities for diversification across markets, as well as multiple asset classes (multi-family, self-storage, and mobile home parks).
 The amount of capital you should put to work in each deal will depend heavily on the amount of capital you are looking to deploy in total. If you are looking to deploy $1M, for example, you can benefit from diversification by investing $100K in 10 deals. On the other hand, if you only have $100K to invest, consider placing $50K in two different deals. Each investor’s financial situation is unique, so there is no steadfast rule to follow here.

Question 10

Are there any tax benefits from a passive investment in commercial real estate?

Accepted Answer

There are many. Depreciated and accelerated depreciation can result in a paper loss on an LPs K-1 statement (pass-through tax doc), which can also be used to offset other gains in your investment portfolio. Besides, 1031s into new deals can possibly help you grow your deferred tax income. A supplemental loan or a refinance can return a significant amount of your initial equity investment, which the IRS considers a non-taxable event. As stated earlier, you can invest using an SDIRA, which would allow you to return your profits to your IRA account, tax-free.

Question 11

What are the risks associated with this investment?

Accepted Answer

Let’s get the brutal truth out of the way first. Because there are outside factors that are not in our control (namely, market conditions), you may risk losing your entire initial investment (NO MORE), just like you could in the stock market, single-family homes (SFHs), a small business/start-up, etc. On a more positive note, we view this as a very unlikely possibility for several reasons. First, our conservative approach to underwriting leaves room to bear a market downturn, which is less likely the case with more aggressive underwriting). Second, we buy proven assets. That is, assets that provide a return on day one, as opposed to appreciation plays or buying very poorly managed assets. Lastly, a couple of key metrics: delinquency rates at the bottom of the financial crisis in 2009 represented 1% on MF properties, as compared to 5% on SFHs; we buy assets where our sensitivity analysis supports returns at or even below historically low market vacancy and rent rates. For example, it’s not uncommon to see a projected single-digit return on a property 10% below projected rents with an occupancy rate of 81%, even in a market with a historically low occupancy rate of 84%. 
All risks associated with investment will be laid out in great detail in the private placement memorandum (PPM).

Question 12

What would happen / what is the Sponsors strategy in the event of a down market? What’s to stop the Sponsor from selling in a down market and wiping their hands clean of the asset?

Accepted Answer

All of our partners’ number one value is capital preservation and downside protection.  Assuming an 8% Pref, the goal during a downturn would be to hold until the market recovers, while still providing the 8% Pref to investors. If things get really bad and we do not meet the 8% Pref in a given year, we have a catch-up that entitles investors to the 8% Pref the next year PLUS the difference from the previous year (i.e., if we only return 4% in Year One, LPs are owed 12% in Year Two). Additionally, we underwrite conservatively to ensure that, even in tough times, we are still able to provide a return to investors.
 The answer to part two of this question is twofold, the obvious part being that the sponsor also makes more money in a strong market, and thus, benefits from holding through a downturn, just as our LPs do. The second and far more important part is a matter of relationships, reputation, and brand. Our sponsors are all, by no mistake, top-notch operators and are in this game for the long haul. Putting our investors’ interest first, even if that means bearing some of the negative implications, helps maintain that already strong relationship, reputation, and trust/faith among our current and prospective partners.

Question 13

How often will communications/updates be sent out?

Accepted Answer

Again, this varies based on the sponsor. But most often, you will see this in line with distribution frequency, monthly or quarterly. Updates will outline a number of items, including but not limited to value-add implementation progress updates, property pictures, and financial statements.
While sponsors’ updates will come in monthly or quarterly, I remain available at all times to my investors as a resource for specific questions or general discussions throughout the life of the project.

Question 14

Will I be able to 1031 from one deal in to the next?

Accepted Answer

Although not guaranteed, there is potential to use the 1031 strategy from one of our deals to the next, given the right timing, thus providing the extremely powerful benefit of tax-deferred growth.

Question 15

How involved can I be as a limited partner?

Accepted Answer

Typically, not involved at all. Most people think that the primary reason behind this is that the sponsor knows what they are doing and wants full control in order to implement the most sound and effective business plan. While this is true to a certain degree, it is by no means the most important factor. As stated several times throughout this page, our main concern is capital preservation and downside protection. By limiting LPs’ roles/voting rights, we eliminate their liability beyond their initial investment in the event of a lawsuit, loan default, or some other misfortune.

Question 16

What is syndication?

Accepted Answer

Syndication, in its broadest sense, is a pooling of resources (time, money, knowledge, manpower, etc.) in order to achieve a larger goal that one would not be able to achieve alone. More specifically, in terms of commercial real estate value-add syndication, it is a structure in which a GP pools money from investors/LPs. The GP implements the business plan and provides a return to LPs who have a limited/passive role in the project.

Question 17

What is an accredited investor?

Accepted Answer

An accredited investor is an individual who meets one or more of the following requirements: $200K+ annual income for the past two years with the expectation to make the same the following year; a combined spousal annual income of $300K for the past two years with the expectation to make the same the following year; $1M net worth, excluding primary residence.

Question 18

Can I invest with my LLC or SD IRA?

Accepted Answer

From our side, the short answer is yes. It would simply entail a slight difference in how you sign the subscription agreement and fund the deal, with no added degree of difficulty. I use Midland Trust to facilitate investments using an IRA.
There are some things to consider, however, such as the UBIT (unrelated business income tax), which is why I recommend seeking the counsel of your CPA, financial planner, etc.

Question 19

What is a supplemental loan?

Accepted Answer

Due to the nature of value-add syndication, it is very common (and the ultimate goal) to create significant value in a property through renovations, tightening operational efficiency, etc. If this is achieved, the sponsor may consider going back to the bank with a now higher assessed property value (since property value = NOI/CAP) and either refinance the property or obtain a second/supplemental loan, depending on the market conditions and what interest rate you can obtain vs. the current interest rate. This allows the sponsor to pull out equity and return it to investors, tax-free.

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