With so many alternative investment opportunities one may often feel like a kid in a candy store. How do you select the one? Apart from knowing your risk and return parameters, target markets, or desired asset class, the top criterion to start with is selecting the operator/deal team. You may often hear the saying “Bet on the jockey, not the horse”. In today’s quick snippet article we will help you do just that by offering the top 8 questions to ask in order to vet a deal sponsor.
1. Opening Questions. How long have you known the operator? Where did you connect with them – through a reference, at local or virtual meet up, at conference, etc.? Did they have a call with you? Have they made an effort to get to know you and understand your investment objectives? What type of interaction have you had with them – deal presentations, webinars, newsletters, educational content, etc.? How frequent?
All of the above help you get to know the person over time, how they communicate, how they operate, how they interact with others (partners and investors).
2. What is their prior real estate or business experience?
They may or may not be new to real estate, though ideally you want to work with an experienced operator.
If experienced in real estate, you can ask about their tenure, experience through business cycles, current assets under management, experience with the particular asset class. For example, have they consistently managed self-storage, if investing in self-storage? Or 100+ unit apartments (vs. 20-30 unit apartments), distressed properties (vs. Class A stabilized properties), etc.? What is their experience in that particular market?
If their real estate experience is limited, what is their business experience? Have they successfully run and operated a business? Have they performed well and been in a leadership positions?
3. Who is the sponsorship team and how is it structured?
As noted in a prior article, commercial real estate and multifamily in particular is a team sport. Therefore understanding the overall sponsorship team, their roles and responsibilities, and the overall team/company structure is important. Ideally there will be at least two or three and no more than six or seven key people. Thus, if something was to happen to one, you have other points of contact and there are others to see through the business plan.
4. Does the sponsorship team have skin in the game, i.e. do they have their own money in the deal? How they participate is less relevant. It is important that they do.
5. What is their character?
Apart from the questions in section one above that will help you get to know the person over time, you can also ask for references from others, including people who invest with them currently and people who invested with them in the past (and if they no longer invest, inquire why not). Public data search and background checks are other means to do so.
6. What is their capital call history – did they ever make one and why? Unexpected things happen but it is helpful to understand what drove the capital call – unforeseen exogenous events, poor budgeting, insufficient upfront reserves, mismanagement, etc.?
7. Can they share examples of deals gone wrong and how did they handle those? Can they share examples of full cycle deals and how did those perform vs. the original projections?
Past performance is not always a predictor of future performance. However, it is a helpful indicator. Especially if the operator has been in business long enough, they will have at least one deal that did not go as planned or potentially lost money.
8. How do they communicate?
There are a couple of ways to gage that:
- How frequent is their reporting and of what quality and detail? How easily accessible is it or how is it distributed? You can always request a copy of past communication.
- How timely is their year-end financial and tax reporting – do they send the K-1s by 3/15 or do they file for extensions?
- How do they deliver bad news or handle unforeseen issues? Ask for an example of such past communication, if available.
After you have had an opportunity to ask these questions and assess the data, ask yourself how your gut feels. That is just as important as you enter into this (hopefully long term) relationship.
Should you have any questions or want to learn more about real estate investing or for an overview of our target markets, please reach out to firstname.lastname@example.org.
Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.