Diligence and the Deal
Lastly , you need to evaluate the deal itself , which is described in the Offering Circular . Here is what you need to consider .
1 ) Holding Period and Exit Strategy : See if this makes sense to you and fits your time frame .
2 ) Dispute Resolution : How are any disputes between the investors and the promoter going to be resolved ? Can the promoter be removed and replaced if necessary ?
3 ) Voting Rights : What voting rights do the investors actually have ? Are you comfortable with that ?
4 ) Reporting : Reports should be monthly or quarterly .
8 ) Overpaying ?: The commercial real estate market , especially multifamily , is “ hot ” right now with syndicators competing for properties and bidding them up . Your promoter could be overpaying , which would severely reduce your investment return . Usually some Comparable Sales are presented in the Offering Circular along with some discussion . Study these carefully . Does your project make sense ?
9 ) Project Financial Measurements : Projects are measured primarily on Internal Rate of Return ( IRR ), which is used to compare investments of all kinds , and on CashonCash Return , which basically expresses the productivity of the investor ’ s cash in the project . Promoters provide estimates of these and others in the Offering Circular . Familiarize yourself with these if you intend to invest in syndications , or hire
an accountant , financial planner , or real estate consultant who is versed in them .
10 ) Investor Returns : Usually there is a Preferred Return , which is paid to investors monthly or quarterly from ongoing operations . It runs 610 %, with 8 % being typical . Anything outside this range should be questioned . Beyond the Preferred Return , there can be additional distributions in which the promoter will probably participate .
11 ) The other primary return is the Split , which applies to profits and distributions above the Preferred Return , plus proceeds from any refinancing . These rates can be 80 / 20 , 75 / 25 , even 50 / 50 . They are described in the Offering Circular , and you need to decide if they are acceptable to you .
5 ) Promoter ’ s Fees : The Offering Circular will disclose these . There will be plenty because syndicators often set up a certain return for the investors , then pile on the fees wherever they can . See the article by Kim Lisa Taylor on the 12 ways syndicators can make money , under “ Diligence and the Promoter ”, above .
6 ) Cash Distributions : When are cash distributions made to investors , and what are they for ?
7 ) Leverage : How much cash downpayment will be made , and what loan ( s ) are there ? 3040 % downpayment is common . Be suspicious of overleveraging with anything less .
Photo by RODNAE Productions from Pexels
Photo by Karolina Grabowska from Pexels 51