FUNDAMENTAL QUESTIONS FUNDAMENTAL QUESTIONS
TO ASK A REAL ESTATE PRIVATE EQUITY FIRM BEFORE MAKING A PASSIVE INVESTMENT
It is crucial for investors to have a comprehensive understanding of the entities or projects they intend to co-invest with or in, prior to committing their capital. As Real Estate Income Trust Investments (REIT) are characterized by relative illiquidity and lengthy asset disposal periods, it is imperative for investors to acquire adequate knowledge about sponsors, stakeholders, investment returns, business plans, and exit strategies before engaging in passive or other types of investments. Therefore, we present 25 fundamental questions that investors should consider asking the REPE firm serving as the syndication sponsor or promoter for a project.
CAN YOU PROVIDE INFORMATION ON WHETHER CAN YOU PROVIDE INFORMATION ON WHETHER THE GENERAL PARTNER HAS PREVIOUS THE GENERAL PARTNER HAS PREVIOUS EXPERIENCE IN EXECUTING SYNDICATED EXPERIENCE IN EXECUTING SYNDICATED IINVESTMENTS? NVESTMENTS?
In a REIT investment, the General Partner (GP) plays a critical role in the syndication and transaction processes. Usually, the GP comprises a group of individuals with specific responsibilities that include identifying investment opportunities, soliciting investors, negotiating, acquiring, and managing the real estate investment to achieve optimal returns for stakeholders. The GP's expertise and skills are crucial to the partnership, and they have the authority to act on behalf of the business without seeking regular permission from other partners. Due to the significance of their role, the GP must possess extensive experience in real estate development and management. Therefore, a pertinent question to ask is, "Has the GP been involved in a similar role and executed comparable deals in the past?"
MAY I INQUIRE ABOUT YOUR LENGTH OF MAY I INQUIRE ABOUT YOUR LENGTH OF EXPERIENCE AS AN ACTIVE REAL ESTATE EXPERIENCE AS AN ACTIVE REAL ESTATE IINVESTOR? NVESTOR?
Undoubtedly, every individual has to commence their REIT real estate investment career at some point. It is worth noting that some operators who have not been active in the Co-sharing programs for long have achieved remarkable outcomes. However, in general, experience holds significant value, particularly if the sponsor has navigated challenging market cycles or handled complex projects with multiple issues to resolve. Ideally, the GP leadership team should possess a robust background and track record in real estate not only on the investment side but al
CAN YOU PROVIDE INFORMATION ON WHETHER CAN YOU PROVIDE INFORMATION ON WHETHER THERE HAVE BEEN ANY INSTANCES OF LOSS ON A THERE HAVE BEEN ANY INSTANCES OF LOSS ON A REIT TRANSACTION IN THE PAST, AND IF SO, REIT TRANSACTION IN THE PAST, AND IF SO, WHAT WERE THE
UNDERLYING REASONS FOR WHAT WERE THE UNDERLYING REASONS FOR THE LOSS? THE LOSS?
In addition to conducting extensive due diligence on a specific project or property, it is important to also inquire about the character and past dealings with the law of a General Partner and their leadership team. Although this can be a challenging question to ask, it is essential to investigate any criminal convictions, especially those related to fraud. Credit checks and general background checks can uncover issues such as contract disputes, unpaid taxes, and past behavior that may reflect on a person's trustworthiness. It is possible to obtain criminal background checks from specialized companies or lawyers in most states. If a General Partner is hesitant or reluctant to answer relevant questions on this issue, it could be a significant cause for concern.
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CAN YOU CONFIRM IF ANY MEMBERS OF
YOUR CAN YOU CONFIRM
IF ANY MEMBERS
OF YOUR LEADERSHIP TEAM, INCLUDING YOURSELF, HAVE LEADERSHIP TEAM, INCLUDING YOURSELF, HAVE EVER BEEN CONVICTED OF FRAUD? EVER BEEN CONVICTED OF FRAUD?
As with other investments, the timing of acquisition and disposal in real estate marke vital, given the cyclical nature of the industr Consequently, it is possible that a capital los occur in certain situations. It is imperative fo sponsor to be transparent and open about a such experiences in the past. A "yes" respon does not automatically disqualify them from participating in the current situation. Instead further exploration and clarification of the circumstances surrounding the loss is necess Despite their expertise, unforeseen or unexp events, commonly referred to as "Black Swa events, can negatively impact operators and subsequent investment performance.
WHO ARE THE GENERAL PARTNERS (BOTH WHO ARE THE GENERAL PARTNERS (BOTH INDIVIDUALS AND CORPORATIONS)? INDIVIDUALS AND CORPORATIONS)?
In REIT or syndicated investments, effective teamwork is crucial as there are multiple sponsors or General Partners involved. To ensure successful investment outcomes, investors need to gather informati on each sponsor's credentials, track record, and experience level, as well as their respective roles and responsibilities in the project. It is reasonable to request such information from the sponsors or condu due diligence through business networks or online resources. Gener Partners can be either individuals or corporations and have full authority to make investment decisions. It is important to note that inexperienced sponsor can jeopardize a promising investment, while seasoned and knowledgeable group can maximize returns even on a average project.
WHAT FEES ARE ASSOCIATED WITH THE PROJECT BEING PROPOSED? WHAT FEES ARE ASSOCIATED WITH THE PROJECT BEING PROPOSED?
It is common for different sponsors to have varying fee structures, and these details should be outlined in the investor subscription documents or private placement memorandum. If not explicitly stated, it is crucial to clarify how the sponsors will be compensated in advance to avoid confusion in the future.
As an investor, it is essential to seek fee structures that demonstrate the sponsor's interests are aligned with theirs. However, it is important to note that all fees payable are separate from the return projections and should be considered as part of the standard project acquisition, management, and disposal costs. While sponsors are typically expected to invest some of their personal capital into the deals to align their interests and incentives, it is unrealistic to expect them to invest significant amounts in every project they are involved in. There is a considerable amount of unpaid effort, commonly known as "sweat equity," that goes into finding, operating, and divesting an investment, and the sponsor investment commit should not always be expected.
The fees charged will not affect the return projections, which are based on "postfees" returns.
Typically, sponsors receive fees through three main channels. Firstly, they may receive an acquisition fee which covers expenses related to identifying, searching for, and acquiring the property. This fee is usually 1-3% of the purchase price and includes administrative and marketing costs.
Secondly, sponsors may receive an asset management fee, typically between 1-3% of monthly revenues, which covers costs related to executing the business plan, overseeing construction and property management companies, implementing value-add strategies, and improving operational efficiencies.
There may be other fees involved as well. Finally, sponsors may receive a split of profits after the preferred returns have been paid out. The most common split is 70/30 (70% to the Limited Partners and 30% to the General Partners), though other splits such as 60/40 & 50/50 are also possible.
Various types of fees may be associated with a project proposal, depending on the nature of the investment and the sponsor's fee structure. These fees should be clearly outlined in the investor subscription documents or private placement memorandum. Common fees include acquisition fees, which compensate sponsors for the costs associated with identifying and securing a property, and asset management fees, which cover the costs of executing the business plan and overseeing the property management and construction companies. Other fees may include disposition fees for selling an asset, construction management fees for overseeing major renovations, refinance hurdle fees for creating additional value in a property, and loan guarantee fees for collateral requirements. It is important for investors to understand the fee structure and ensure that the sponsor's interests are aligned with their own.
For more details about the fees please checl our Fees page, Click here
CAN YOU EXPLAIN IN MORE DETAIL THE PROFIT CAN YOU EXPLAIN IN MORE DETAIL THE PROFIT SPLIT BETWEEN THE GP AND LPS? SPLIT BETWEEN THE GP AND LPS?
A common approach among sponsors is to use a "waterfall" arrangement to structure their transactions. Under this arrangement, the first "hurdle" is an 12% preferred return (“pref”), which ensures that LPs receive 100% of profits until they achieve an 12% return. Subsequently, the majority of transactions are structured with a 70/30 split between LPs and the General Partner. However, other splits are also possible. It should be noted that in some cases, a second hurdle based on the internal rate of return (IRR) may be implemented. After a predetermined IRR threshold (typically between 15-18%) has been reached, the split between the parties may shift to a 60/40 or 50/50
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WHAT IS THE LOAN TO VALUE RATIO (“LTV”)?
WHAT IS THE LOAN TO VALUE RATIO (“LTV”)?
The loan-to-value (LTV) ratio is an evaluation process used by loan providers to assess lending risk before approving a loan. It is expressed as a percentage, such as 60% or 80%, and represents the proportion of the loan compared to the assessed property value by the lender. Each loan is evaluated on its own merits, with a higher LTV ratio indicating a riskier loan that may attract a higher interest rate due to the lower proportion of property ownership by the borrower. Conversely, a lower LTV ratio is considered less risky and may result in a more favorable interest rate. While there is no specific LTV ratio that is universally considered "good," lenders use limits and ranges to evaluate loans and refinancing situations. In cases where the LTV ratio is at or above 80%, borrowers may need to obtain private mortgage insurance or provide a personal guarantee. When refinancing an investment property, there are also maximum LTV ratios, which can be as high as 80% for those seeking to partially or fully cash out.
CAN I SPEAK WITH ONE OF YOUR CURRENT CAN I SPEAK WITH ONE OF YOUR CURRENT IINVESTORS? NVESTORS?
It is advisable for potential investors to request to speak with current investors of sponsors or other members of the sponsor group in order to gain a better understanding of their experience with the sponsor. Having access to a range of references can provide different perspectives and aid in determining if the proposed investment is a suitable fit. For investors, it is important to find sponsors who align on both a personal and business level, as this can lead to successful and mutually beneficial relationships. When asking questions, investors can gain deeper insights into the project and opportunity at hand. Additionally, speaking with investors who have participated in multiple deals with the sponsor can be beneficial. Overall, real estate syndication involves forming holistic relationships that benefit everyone involved, including s i t b t managers, lenders, brokers, an
CAN YOU ELABORATE ON THE SPONSOR'S CAN YOU ELABORATE ON THE SPONSOR'S ALIGNMENT WITH INVESTORS, AND WHETHER ALIGNMENT WITH INVESTORS, AND WHETHER PREFERRED RETURNS ARE PART OF THIS PREFERRED RETURNS ARE PART OF THIS INVESTMENT OPPORTUNITY? INVESTMENT OPPORTUNITY?
It is crucial to ensure that the interests of all parties involved in a REIT transaction, including the General Partner (GP) or sponsor and Limited Partners (LPs), are aligned. Typically, sponsors contribute a portion of the equity capital (usually between 5% and 25%) and play a vital role in identifying investment opportunities, acquiring or developing real estate, managing it, and receiving fees for their services. They are also entitled to receive an incentive fee or promoted interest once the LPs earn returns exceeding the targeted hurdles of return. In contrast, LPs or passive investors receive a preferred return based on their initial investment at a preagreed percentage. They also receive a share of the cash flow, usually 70/30 in their favor, resulting in favorable cash-on-cash returns. The preferred return serves as a means for the GP to demonstrate their commitment to pr passive investors and ensuring alignm investors receive the first proceeds o
WHAT HAPPENS IF ANY DEAL DOES NOT GO AS WHAT HAPPENS IF ANY DEAL DOES NOT GO AS PLANNED AND RETURNED PAYMENTS CAN’T BE PLANNED AND RETURNED PAYMENTS CAN’T BE ACHIEVED? ACHIEVED?
Real estate investments, like any other investment, carry certain risks. In any real estate investment projects, an average appreciation rate of 7% was achieved in the last 70 years, not to mention the last 20+ years where the average appreciation was 13.7%. However, real estate investments are subject to various variables, and minor issues are likely to arise, especially in value-add situations. These issues may cause delays in renovation timelines due to factors such as contractor unavailability, labor or material shortages or delays, change in work orders, inspection delays, natural disasters, or unforeseen circumstances. Example: If we buy a property for $1M dollar and let’s assume the min appreciation of 7% over 5 Years of acquisition. The value of the property at the end of the 5 years will worth $1,402M. Assuming we finance this property with 80% LTV then the initial investment would be $200K. The gross profit is 201% over 5 years and 40% per year. The appreciation potential of a real estate investment is closely tied to the stability of its growth in appreciation as well as forced appreciation. If it seems that appreciation projections may be affected, and returns may not be available to shareholders, discussions with the operator should take place to ensure that contingencies are in place. One way to mitigate such concerns is by establishing a deal structure that includes preferred returns. If returns are not achieved through cash flow, they may be secured from back-end profits, potentially at the expense of the GP's share of profits.
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CAN YOU PROVIDE INFORMATION ON
YOU
THE INVESTMENT?
Pyramine Investment has referred to the difference in Internal Rate of Return (IRR) between scenario 1 and scenario 2 as the "Velocity of Returns." While both scenarios have the same Return on Investment (ROI) of 100%, scenario 2 has a higher IRR of 14.1% compared to scenario 1's IRR of 14.87%. The reason for this is that in scenario 2, the investor receives annual distributions and the bulk of the profits in the fifth year, resulting in a faster velocity of returns. It's important to und t d th diff b t ROI d IRR h l ti i t
THE CAN
PROVIDE INFORMATION ON THE FREQUENCY AND COMMENCEMENT TIMING OF FREQUENCY AND COMMENCEMENT TIMING OF DISTRIBUTIONS FOLLOWING THE CLOSING OF DISTRIBUTIONS FOLLOWING THE CLOSING OF THE INVESTMENT?
NVESTORS?
CAN YOU PROVIDE INFORMATION ON THE CAN YOU PROVIDE INFORMATION ON THE PERCENTAGE OF YOUR CURRENT PROPERTIES PERCENTAGE OF YOUR CURRENT PROPERTIES UNDER MANAGEMENT THAT ARE MEETING, UNDER MANAGEMENT THAT ARE MEETING, EXCEEDING, OR FALLING SHORT OF THE INITIAL EXCEEDING, OR FALLING SHORT OF THE INITIAL PRO-FORMA PROJECTIONS MADE TO YOUR PRO-FORMA PROJECTIONS MADE TO YOUR IINVESTORS?
Syndicators typically evaluate numerous properties in a year and assess their financial potential through a process called underwriting. This involves analyzing the current numbers and projecting future growth in performance and profitability, such as future growth, to provide investors with an estimate of expected returns. However, it's essential to compare these initial projections with the actual returns achieved to determine if the underwriting was conservative, realistic, or aggressive. Syndicators who consistently achieve or exceed their projected returns demonstrate a realistic and conservative approach to underwriting. By evaluating a syndicator's performance across numerous projects, it's possible to identify those who use realistic underwriting assumptions, those who might be conservative, and those who tend to overpromise and underdeliver. Ultimately, assessing a syndicator's track record and underwriting approach can help investors make informed decisions about potential investment opportunities.
COULD YOU PROVIDE INFORMATION ON COULD YOU PROVIDE INFORMATION ON WHETHER THE GENERAL PARTNER (GP) OF THE WHETHER THE GENERAL PARTNER (GP) OF THE INVESTMENT IS A PARTICIPANT IN THE DEAL, INVESTMENT IS A PARTICIPANT IN THE DEAL, AND IF SO, WHAT PERCENTAGE OF THE EQUITY AND IF SO, WHAT PERCENTAGE OF THE EQUITY THEY ARE INVESTING? THEY ARE INVESTING?
To demonstrate alignment of interests and their commitment to achieving strong returns, it is common for General Partners (GPs) to invest in the model. Typically, the sponsor team invests around 5-10% of the total capital required to close the deal, with the remaining capital being raised from Limited Partners. However, in some cases, the sponsor team may invest even higher amounts, up to 20% or more. Similarly, it is beneficial for operators to also have invested in the deal to align their interests with those of the investors. A reasonable expectation is that operators should have made a minimum investment of $100,000 to ensure that they make sound decisions that benefit all parties involved in any deal.
CAN YOU PROVIDE INFORMATION ON THE LAW CAN YOU PROVIDE INFORMATION ON THE LAW FIRM THAT IS REPRESENTING YOU IN THIS DEAL? FIRM THAT IS REPRESENTING YOU IN THIS DEAL?
It is important to note that credible sponsors tend to partner with reputable law firms and the reverse is also true. The legal teams that are involved in a deal should have a good reputation and should not have any record of disciplinary actions or violations of regulatory laws. Additionally, it is important to ensure that the legal team has the required expertise in real estate or securities law, rather than some other legal field.
CAN YOU PROVIDE INFORMATION ON THE CAN YOU PROVIDE INFORMATION ON THE ACCOUNTING FIRM HANDLING THIS DEAL? ACCOUNTING FIRM HANDLING THIS DEAL?
Just like the importance of a reputable law firm, it is equally significant to have an experienced accounting firm working on a REIT investment. This will assure investors that the GPs are employing qualified and trustworthy professionals, and all accounting and auditing work will be transparent. The accounting and auditing firms play a crucial role in handling payables and receivables, as well as monthly, quarterly, and annual distributions. Additionally, some funds and REITs may require the accounting firm to conduct an audit.
CAN YOU PROVIDE SOME INSIGHTS INTO THE CAN YOU PROVIDE SOME INSIGHTS INTO THE REASONS FOR SELECTING THIS PARTICULAR REASONS FOR SELECTING THIS PARTICULAR REGION FOR INVESTMENT? REGION FOR INVESTMENT?
Passive investments in REIT have become increasingly popular among both domestic and foreign investors. Understanding a sponsor's rationale for selecting a particular region or project can help investors decide whether or not to invest. A sponsor may be drawn to a region because of its economic potential, such as new infrastructure projects, job growth, or an increase in population demand. Alternatively, the sponsor may see an opportunity to take advantage of a market with high demand and low supply.
In addition, the ability of an operator to invest in multiple regions is a testament to the strength of their asset management team. Pyramine Investment, for example, has investments in GTA and South-West Ontario and is exploring opportunities to expand into other regions and provinces.
COULD YOU SHARE ANY CONCERNS OR COULD YOU SHARE ANY CONCERNS OR POTENTIAL DRAWBACKS YOU HAVE IDENTIFIED POTENTIAL DRAWBACKS YOU HAVE IDENTIFIED WITH THIS MODEL? WITH THIS MODEL?
The response to this inquiry can reveal the level of openness and transparency of the operator regarding the model. If the sponsor only presents a positive outlook on the investment, without acknowledging any potential drawbacks or risks, it may raise concerns for a careful investor. Real estate transactions often involve some degree of uncertainty or potential risks, and it is crucial for the sponsor to acknowledge and address these issues candidly.
1.WHAT IS THE EXIT STRATEGY AND WHEN? AS IT 1.WHAT IS THE EXIT STRATEGY AND WHEN? AS IT IS ALREADY CLEAR AND CONCISE? IS ALREADY CLEAR AND CONCISE?
The exit strategy refers to how the property assets will be liquidated and profits will be distributed to stakeholders such as the GP and LP. Typically, most REIT investments have a holding period of 3-7 years with an average of 5 years, but some legal documents may allow for longer holding periods. This is to ensure that the owning entity is not forced to sell due to external factors and can hold through a down market until the market recovers. It's important to note that REIT investments are considered illiquid investments, but in the event of an LP needing to exit due to a life event, the Sponsor will work in good faith to try and find an earlier exit.
IN THE PAST 24 MONTHS, HOW MANY DEALS IN THE PAST 24 MONTHS, HOW MANY DEALS HAVE YOU ACQUIRED? HAVE YOU ACQUIRED?
It's crucial to take into account the sponsor's current and recent activity as it indicates their track record. Being involved in ongoing or recently completed projects allows investors to assess the sponsor's performance and operational skills, as well as their knowledge of the current acquisitions and investment environment. Additionally, this demonstrates the sponsor's ability to attract recent investors who may potentially be introduced to future deals.
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1.COULD YOU PROVIDE AN EXPLANATION OF 1.COULD YOU PROVIDE AN EXPLANATION OF BUSINESS MODEL THAT PYRAMINE INVESTMEN BUSINESS MODEL THAT PYRAMINE INVESTMEN USES, AS WELL AS THE RETURN ON INVESTMEN USES, AS WELL AS THE RETURN ON INVESTMEN ((R.O.I) R.O.I)
Investors tend to focus on return metrics when evaluating a sponsor, b
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WHAT IS THE FREQUENCY OF INVESTOR WHAT IS THE FREQUENCY OF INVESTOR COMMUNICATIONS/UPDATES? COMMUNICATIONS/UPDATES?
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WHAT IS THE TOTAL VALUE OF YOUR ASSETS WHAT IS THE TOTAL VALUE OF YOUR ASSETS UNDER MANAGEMENT “AUM”? UNDER MANAGEMENT “AUM”?
The frequency of investor communications and updates may differ depending on the sponsor, but typically, passive investors prefer monthly updates. These reports usually cover a range of information, such as progress updates on acquisition, value-add implementation, financial statements, and properties photographs, among others. A significant advantage of investing in REIT syndications as opposed to buying stocks online is the accessibility to the sponsor's team. Despite the monthly update frequency, investors may still have questions or require more regular updates, and in such cases, they can easily contact the sponsor's team for clarification.
It is worth noting that every REIT firm has to start somewhere, and having a low AUM does not necessarily mean that the sponsor is inexperienced or unreliable. In such cases, it becomes crucial to closely examine the team's credentials, experience, and collective achievements. It is also important to evaluate the firm's growth trajectory in terms of AUM, as this is indicative of their experience in areas such as acquisitions, management, value-add strategies, and divestment. Pyramine Investment, for instance, started with $0 AUM not too long ago but has since established a track record of at least more than twenty properties, resulting in a rapid increase in its AUM.
HOW MANY DEALS SIMILAR TO THIS ONE HAVE HOW MANY DEALS SIMILAR TO THIS ONE HAVE YOU COMPLETED? TO SOUND LESS REPETITIVE?
YOU COMPLETED? TO SOUND LESS REPETITIVE?
Knowing how many similar deals the sponsor has completed is important to passive investors as it assures them that the sponsor's team and GP have the necessary knowledge and experience to manage any problems that may arise during the investment process. This is particularly crucial as managing properties is not without issues. Therefore, it's essential to establish a relationship with the sponsor and understand their level of experience.
CAN YOU PROVIDE INFORMATION ON THE CAN YOU PROVIDE INFORMATION ON THE PROPERTY MANAGER, SUCH AS HOW THEY WERE PROPERTY MANAGER, SUCH AS HOW THEY WERE CHOSEN AND HOW MANY UNITS THEY CHOSEN AND HOW MANY UNITS THEY CURRENTLY MANAGE?
CURRENTLY MANAGE?
Anticipating the future when acquiring a property is crucial, and part of that process involves selecting a proficient property manager ("PM") to oversee the property's operations. The PM team is responsible for executing the business operational plan efficiently and on schedule.
When acquiring a property, it's crucial for the sponsor to manage the professional property manager ("PM"). The PM team's primary responsibility is to execute the business operational model effectively and on time. The qualitative impact of a PM can have quantitative effects.
To manage the PM team, the sponsor must follow several steps. They must first identify, review, and engage the proposed PM team after running background checks and verifying references. Then they must check the number of units the PM team is managing and determine whether they are a "volume" property manager or one known for quality. Additionally, the sponsor must verify the PM team's track record and relevant experience in the sub-market where the asset is being acquired. Finally, the sponsor must ensure that the PM team has experience managing a similar class/type of property as the one being acquired and arrange a tour of some of their other properties to get a better idea of their management style and quality.
