When you’re investing in multifamily real estate, your sponsor’s marketing materials and the documents s/he prepares are important elements to evaluate. BAM founder and CEO, Ivan Barratt, advises what to look for, as well as what to ask your sponsor in today’s edition of the BAM blog…
How Marketing Materials Should Look
This one isn’t complicated. Ivan says that good marketing material looks good, clean, and professional. In other words, you’ll know it when you see it.
Look for What You Don’t See
According to Ivan, it isn’t just what’s in the documents but it’s also what’s not. Figuring out the important things that are missing is key, and comes with experience. Ivan says that if you haven’t looked through 30, 40, 50 or even 100 marketing material offerings, you’re lacking the “finger-tip feel” of what a good deal looks like from a bad deal.
Frequently Missing Items
Ivan says that he often sees the same items left out of deal documents. These are things like a “sensitivity analysis.” Broken down further, he’ll look for an occupancy sensitivity which tells you the break-even occupancy of every year. The other sensitivity Ivan looks for is the cap rate sensitivity, which is good to see what happens if the cap rates go up; this information should be in the offering memorandum.
Ivan’s Guide to the Offering Memorandum
According to Ivan, the Offering Memorandum is the impressive marketing material that should include the following (at least): Executive Summary, Business Plan, Project Outline, Projections & Returns, Comparable Properties, Market Specifics, and Team Information. Ivan notes that the projections are a key point of the marketing materials. Pay attention to what they show: is it best case or worst case, how many periods do they show, etc.
The Importance of the PPM
Ivan places specific importance on the Private Placement Memorandum (PPM), which although not particularly exciting, is incredibly important to the deal. It’s a large document outlining the deal and includes the legal framework. Ivan is surprised by how many people don’t have advisors review the PPM documents. Ivan strongly advises you have a CPA, attorney, and even a financial advisor review the deal’s PPM, and would never invest in any deal or place capital with someone without having his attorney and CPA (and maybe financial advisor) review the PPM and provide feedback. He points out most sponsors won’t change them, but it’s important to have at least an attorney point out any blind spots.
Communication is Key
Once you’ve invested, Ivan recommends determining how easy it is to get reports from your sponsor and know how your investment is performing. You can ask the tough questions: does the sponsor have a dedicated team for investor relations? Do they have an online investor portal to log in and check investment information? Critically, do they file their K-1 tax documents on time? Ivan sees less-experienced sponsors unable to deliver on this important piece of investor relations. The importance of communication is why BAM has both a dedicated investment relation team, as well as an online investor portal. Investors can utilize the portal to check investment information online in real time. The team assists Ivan in compiling monthly and quarterly reports so investors see how the property is performing.
More questions on what to look for in a deal or what makes a good sponsor? Head over to ivanbarratteducation.com! You’ll find a free library filled with informative videos featuring Ivan himself, as well as blog articles written by Ivan and with his industry insider perspective.