Real estate syndication deal sponsors need to sell their deals to investors, so they need to sit down at the table prepared. Here are some questions that will probably get lobbed at you, and some tips on preparing for that investor meeting.
Passive Investor Concerns
As with any investment, people are going to have some concerns and questions before letting go of their money. Despite real estate deals on multifamily properties on the rise, scares with cryptocurrency and volatile markets mean that investors are more careful when entering a deal.
Deal sponsor track record
As a passive investor, syndication is an excellent opportunity to get in on a great deal, but there are also some risks involved. You could lose your money. You’ll want to be sure that your deal sponsor has a good track record of delivering returns outlined in your private placement memorandum (PPM).
Investors are going to want to understand the sponsor’s experience, previous performance, and appetite for risk. One tell regarding how conservative a deal sponsor is their exit cap versus in-place cap rate.
Passive investor protection
Passive investors are also going to be concerned about their exposure to liability or loss. Passive investors are not involved in managing deals, which insulates them from the liability incurred by the managers or general partners who are calling the shots on the day-to-day operations of the syndication. Generally, passive investors are only liable for up to their investment in syndication. In order to maintain their limited liability protection, passive investors need to be careful not to get involved in aspects of the deal that are the syndicator’s responsibility. While passive investors don’t need to know everything about a deal, they should attempt to understand the basics of a deal like the distribution structure, the risk-reward profile, and potential exit plans. Most importantly, they need to trust the deal and the sponsor.
Top 6 questions deal sponsors need to answer
Without further ado, here is our list of the top six questions deal sponsors absolutely need to be prepared to answer without hesitation. As you are working to build your reputation, getting these answers right will help you effectively inform potential investors and get your deals in the works!
Can you prove your track record?
Real estate syndication deal sponsors need to grow their positive reputation to attract investors. One bad deal can make or break their ability to get the funding they need.
If you’re just starting out as a syndicator, one way to build your reputation is by proposing theoretical deals. Talk to family and friends to see what they think about your proposal, and see if they would be willing to invest. If you can get enough verbal commitment to your deal, that can serve as a resource when you need to pitch a true deal.
Do you have experience in the asset class?
There is more than one type of syndication deal, and showing your experience (or lack thereof) in a specific asset class can lend you credibility. For example, you may have an excellent track record setting up multi-family deals but have zero experience with land development investments. It is important to be open and honest upfront with investors so they know exactly what they are getting into.
The main asset classes you should be able to address are:
- Multi-family
- Mobile-home parks
- Retail
What is your asset management team’s experience?
Being able to show an investor how your asset management team works together and brings various experiences to the table is important to gaining buy-in. You’ll want to be able to explain your team’s communication practices, how team members vote, and how profits are distributed.
An operating agreement needs to lay out the communication terms between the syndicator and the investors, which may include monthly or quarterly meetings. Ensuring transparency throughout the process will help with the overall performance of a property.
How much do investors get paid?
Syndicators will also want to let investors know how much profit they are entitled to. Syndicators typically earn between 25% and 50% of distributable cash generated from operations, refinance, or sale of a property, which may be paid as a direct split between the members and the syndicator (i.e., 65/35) or as a preferred return. Be sure to find out how the syndication is set up to understand how much of the slip on a movement will be investors’ passive income and how much goes to the principal.
What is your investment philosophy?
Ensuring your real estate syndication is going to be successful means aligning your investment philosophy with your investors’. In other words, you need to make sure that everyone involved in the deal has the same goals and expectations. This will help reduce friction and conflict down the road.
You’ll also want to cast a wide net when seeking out investors. You never know where you might find someone who is interested in your deal. However, you also need to be selective about whom you bring on board. Not everyone is going to be a good fit for your syndication.
Related Content: Real Estate Syndication 101 - The Basics Revealed
What is your succession plan?
Any savvy investor is going to want to understand what the deal succession plan is. If something happens to the lead investor, the syndication will need to find a new leader who can take charge and make decisions. This can be a daunting task, so it’s important to have a plan in place for when things go wrong. This plan should be readily available to investors to avoid any conflict in case something should happen down the line.
What are the projected returns on the investment?
The expected return is the profit or loss that an investor anticipates on an investment based on the sponsor’s known historical rates of return (RoR) and/or deal-specific projections. Syndication deal sponsors should have a clear understanding and the ability to convey to investors estimates regarding their projected returns. This of course ties back into the sponsor’s track record and reputation, which are both fundamental to getting buy-in and selling the deal.
Whether you’re considering investing in a real estate syndication or putting together a deal to attract investors, there are some basic questions that are going to come up. In this article, we’ve outlined some of the major questions investors should be asking, and deal sponsors should be ready to answer.
We’re here to help you determine the right questions to ask no matter where you fall within the real estate syndication ecosystem!
This blog post is intended to provide general information and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship with Premier Law Group.
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