Also I used to be looking for lower management fees until I found that some of my best paying investments had high management fees. So if the sponsor has a history of charging higher management fees and getting results that justify the higher fees this is a buy indicator.
Over subscribe and pay from reserves?- sounds like a PONZI scheme...
This below from AI -
Oversubscription in private equity is not inherently illegal; it is a common indicator of high demand for a fund. It becomes illegal when it involves fraudulent or deceptive practices that violate securities laws and investor protection regulations.
Key situations in which oversubscription could become illegal include:
Misrepresentation and Lack of Transparency: If a private equity firm uses "incomplete or inaccurate information" about the fund's costs, potential returns, or capacity to "attract investment from outside investors," it could be considered a violation of transparency requirements and potentially fraud.
Charging for Unperformed Services or Undisclosed Fees: It is illegal for fund managers to "wrongfully charg[e] fees and expenses for unperformed services" or charge fees on a non-pro-rata basis without proper disclosure.
Undisclosed Preferential Treatment: Providing certain investors "preferential treatment" (e.g., better redemption terms or special access to information) without disclosing these arrangements to all other current and prospective investors can be a violation of regulatory rules designed to ensure fairness.
Violations of Fund Agreements: A fund must adhere to the terms and conditions outlined in its offering documents (e.g., private placement memorandum or limited partnership agreement). Raising capital beyond the stated maximum capacity without proper investor consent and amendments could violate contractual obligations and potentially be illegal.
Breaching Securities Laws: All offers and sales of securities, including those by private companies, must be either registered with the SEC or conducted under an exemption from registration. Failure to comply with these rules (e.g., rules under Regulation D) when managing oversubscription could lead to legal penalties.
Broker Misconduct: A broker convincing investors to invest in overly risky private placement offerings that are unsuitable for them may face regulatory action, such as a settlement with the Financial Industry Regulatory Authority (FINRA).
In general, the key is the manager's adherence to regulatory requirements for disclosure, transparency, and fair dealing with investors. Failure to do so, especially in the context of high demand, is where the practice crosses into illegality
Agree: the deal is a no-go on many levels. It is representative of what’s out there in multifamily right now. Hard to get excited about any of it.
Over-subscribing is a terrible practice, and yet I see it done in one-off syndicated CRE deals on a regular basis - because it’s the easiest way to take a hum-drum deal like this and make it more appealing..
I really don’t like underwriting refinances mid investment. You’re already making a massive assumption on rates on the backend (exit cap), so why add to it? If it’s a fix and flip bridge deal, I’d rather see a shorter term hold.
I’ll point out another blind spot for passive LPs on a deal like this - the cap rate. Cap rates as advertised by sellers and GPs are essentially meaningless, often shoving obvious Opex (e.g., unit turn costs) below the line by calling it Capex, thus inflating cap rates.
Also, is it a trailing (actual) or projected cap rate? Tax-adjusted (as in, does it consider the often large post-sale increase in assessed value and related property tax)?
Lots of room for fudging, indicating this could easily be a negative leverage deal (as most MF deals are today unless they’re 60s/70s vintage or very tertiary).
Also, the math on Y1 projected cash yield indicates the loan is amortizing. With thin positive leverage (or negative leverage), this means cash yields will be under pressure without significant NOI growth. Not likely when real wages are basically flat.
I disagree with others that these returns are not sufficient, but only if the deal is properly and cleanly underwritten, robust to the downside, etc. Not sure this is.
Not enough money in this deal. Not enough upside.
Also I used to be looking for lower management fees until I found that some of my best paying investments had high management fees. So if the sponsor has a history of charging higher management fees and getting results that justify the higher fees this is a buy indicator.
Over subscribe and pay from reserves?- sounds like a PONZI scheme...
This below from AI -
Oversubscription in private equity is not inherently illegal; it is a common indicator of high demand for a fund. It becomes illegal when it involves fraudulent or deceptive practices that violate securities laws and investor protection regulations.
Key situations in which oversubscription could become illegal include:
Misrepresentation and Lack of Transparency: If a private equity firm uses "incomplete or inaccurate information" about the fund's costs, potential returns, or capacity to "attract investment from outside investors," it could be considered a violation of transparency requirements and potentially fraud.
Charging for Unperformed Services or Undisclosed Fees: It is illegal for fund managers to "wrongfully charg[e] fees and expenses for unperformed services" or charge fees on a non-pro-rata basis without proper disclosure.
Undisclosed Preferential Treatment: Providing certain investors "preferential treatment" (e.g., better redemption terms or special access to information) without disclosing these arrangements to all other current and prospective investors can be a violation of regulatory rules designed to ensure fairness.
Violations of Fund Agreements: A fund must adhere to the terms and conditions outlined in its offering documents (e.g., private placement memorandum or limited partnership agreement). Raising capital beyond the stated maximum capacity without proper investor consent and amendments could violate contractual obligations and potentially be illegal.
Breaching Securities Laws: All offers and sales of securities, including those by private companies, must be either registered with the SEC or conducted under an exemption from registration. Failure to comply with these rules (e.g., rules under Regulation D) when managing oversubscription could lead to legal penalties.
Broker Misconduct: A broker convincing investors to invest in overly risky private placement offerings that are unsuitable for them may face regulatory action, such as a settlement with the Financial Industry Regulatory Authority (FINRA).
In general, the key is the manager's adherence to regulatory requirements for disclosure, transparency, and fair dealing with investors. Failure to do so, especially in the context of high demand, is where the practice crosses into illegality
Agree: the deal is a no-go on many levels. It is representative of what’s out there in multifamily right now. Hard to get excited about any of it.
Over-subscribing is a terrible practice, and yet I see it done in one-off syndicated CRE deals on a regular basis - because it’s the easiest way to take a hum-drum deal like this and make it more appealing..
Really solid analysis Leyla. I wouldn’t invest in this deal. Georgia is terrible with evictions right now.
I really don’t like underwriting refinances mid investment. You’re already making a massive assumption on rates on the backend (exit cap), so why add to it? If it’s a fix and flip bridge deal, I’d rather see a shorter term hold.
I’ll point out another blind spot for passive LPs on a deal like this - the cap rate. Cap rates as advertised by sellers and GPs are essentially meaningless, often shoving obvious Opex (e.g., unit turn costs) below the line by calling it Capex, thus inflating cap rates.
Also, is it a trailing (actual) or projected cap rate? Tax-adjusted (as in, does it consider the often large post-sale increase in assessed value and related property tax)?
Lots of room for fudging, indicating this could easily be a negative leverage deal (as most MF deals are today unless they’re 60s/70s vintage or very tertiary).
Also, the math on Y1 projected cash yield indicates the loan is amortizing. With thin positive leverage (or negative leverage), this means cash yields will be under pressure without significant NOI growth. Not likely when real wages are basically flat.
I disagree with others that these returns are not sufficient, but only if the deal is properly and cleanly underwritten, robust to the downside, etc. Not sure this is.