I’ve been an LP/investor with both good and bad real estate operators. Here’s a thread on how to select:
1. Seems obvious, but CHECK REFERENCES. What have they done in past? Ask to speak to LPs in their previous deals.
2. Character means more than the deal itself.
3. Read Frank Gallinelis book about valuing commercial real estate. From a birds eye view, does the deal make sense?
4. Make sure the GPs have significant cash of their own in the deal.
5. Define fee structure. Not just the 70/30 split, but the acquisition, “finance” and ..
“deal syndication” , or “development” fees. Unethical operators can use these to enrich themselves prior to getting to the “profit” split.
6. Define debt amount. Is GP getting max leverage at 75 to 80% LTV? That is unusual and often a red flag. More typ..
These fees should be
More typical is closer to 60 to 65% LTV, which helps to both reduce risk and increase chances of steady distributions.
7. Who gets the depreciation? This is more important. Depreciation can help LPs defer taxes on their distributions until investment exit. Ensure..
Ensure depreciation split between LPs and GPS is clearly defined.
That’s about it! By far most important thing however is checking references, talking with previous LPs, checking experience, and gauging character.