Our 12 Step Process for scoring partners:
There are over 4,000 private placement partners in the United States, and no constant aggregator of management teams and the businesses they excel in. We have an internal system for scoring, rating and constantly managing our managers. Doing what you say you are going to do is a huge influence in our decision to implement a management team. We will not go into the weightings of our scoring, but here are a few key factors for you to keep in mind when choosing a 506b or 506c operator. We use the dad joke acronym of T-R-A-D-E-D and F-L-I-P-P-D :
- Track Record – We are looking for teams that have historic results of at least 10 projects. When the management team first projected the opportunity and return expectation- did they under promise and overdeliver? Did their time frame come in line?
- Demographics of the Deal – We believe that the wheelhouse is essentially 50-200 units, in B- to B+ neighborhoods in growing cities in the Southeast and Southwest part of the country are ideal. Management teams can make money in all markets, but we prefer the wind at the sails in markets that have multi-year trends or rising population and incomes gradually rising. Taxes and landlord-friendly states continue to add higher scores.
- Diamonds in the Rough – Does this manager have a track record of creative wins? Whether it be financing terms, speed of a construction flip, ability to add more units or ability to notice a demographic shift and propel investment returns. Is there an x-factor with this group? Many people assume off-market deals are the only way to differentiate yourself in the space, but really every asset owner is well-versed in these opportunities. Do these General Partners really try to maximize every ounce of an opportunity for the highest Internal Rate of Return. Not holding forever, but also not leaving 20% of the income max be left off the table.
- Fees and Commissions – There are many fees that could be overlooked, we properly identify and aggregate to ensure there are not excess fees that tilt the beneficiary of the investment. We prefer 8% fixed, with 70/30 splits up to 15% IRR, above 15% we see 50/50 splits commonly. We do not want to see excess acquisition fees, property management fees, refinancing fees, sales fees or asset management fees. We understand the industry averages for these and for companies looking to grow their investor pool, we expect those fee structures to be slightly in the favor of the Limited Partner- and definitely nothing in excess
- Annual Revenue of General Partner- We are actively looking for new managers that will benefit from capital infusion. The larger the GP business, the more profits they inherently share for themselves and less available to Limited Partners (YOU!) . We want the business to want and need capital from placement holders. We want the splits to be very beneficial to the LP, while incentivizing the General Partner to enhance their rate of return. Sometimes called waterfalls and/or splits.
- Project Managers Money In The Deal – Are they implementing investors capital only or are they investing their personal capital in addition to their GP capital. If yes, how many owners and team members and what is the percentage of the typical deal invested by in-house management.
- Leadership- Same management teams, same players in the company, same construction team and property managers. If there is a major difference, are they transparent to disclose that information? Are they accurately accessing the risk of changes within the management teams. Who is responsible for which duties?
- Investor Communication – Are there materials to read, research and do due diligence. Are there web conferences and one-on-one meetings set up if necessary. How are the communication methods with the share holder leading up to the purchase of the asset. Throughout the process monthly or quarterly, how transparent are these managers with problems, updates, expected distributions, taxes and any irregularities.
- Experts in the Field- Knowing what is in your backyard is critical. The managers that specialize in a few key areas and know it inside and out really benefit from a level of unknown unknowns, meaning that there can or could be permit problems or town legal issues or preferred construction managers in a municipality. The more well known a manager is in a community or state, the better the results are for all the partners.
- Raising Capital- Accredited and Non-Accredited Investors – Does the GP have a process for both Accredited and Non-Accredited Investors to invest. At this stage we are looking for $50,000 as a minimum investment with our General Partners. We continually access and will where GPs assets are coming from, whether it be institutions, family offices, businesses or accredited investors. We like to see a diversified basket.
- Deal Flow- How often are these managers working on a new project? We are looking at the teams and making sure that they have the asset managers and the correct amount of people for the deal flow they are executing. We also want to work with managers that are not purchasing assets for the flow of their business, but for the investment opportunities that are currently available.
- Protecting our LPs- Private Placements can have some level of liability. We want to ensure the General Partner and the people allocating their liability are well capitalized. We do not want there to be a risk that is unforeseen. Furthermore, we are adding scoring points to stronger, better-capitalized members to ensure that level of protection for our end stakeholders.