July 25th, 2012 12:39 EST
Dealing with Investors Who Want to Be Involved
Last week over lunch, one of my prospective investors asked me a simple but penetrating question that I would like to pass along to the readers of my column. Successful syndicators need to understand this material.
Question: I like your fund concept, but can I evaluate each of the properties that you buy one at a time?
For the last 25 years, we did syndications where the investor would look at the deal and make a decision on a deal by deal basis whether or not they wanted to participate in the project. However, the economic circumstances are very different now than they were 10 years ago. In the "old days", the promoters would tie up a property by giving the property`s seller $10,000 or so and then telling the seller that they will be back in three months with the money ready to go.
Then, the promoter or syndicator would drive their investors around town showing them the property, convincing them to write checks. When the appropriate number of dollars had been collected, the syndicator would call the seller of the property and tell them that they were ready to move forward. That`s a great model, and it worked great for a long time. It helped investors be comfortable. But it`s not working in this distressed environment.
We don`t have time for the people who invest in our fund to evaluate the properties on a deal by deal basis, and the reason is simple:
This environment requires a level of readiness rarely seen in the last several decades. When the promoter or syndicator shows up to the bargaining table, if they want any kind of a strong deal for their investors (meaning a low price), they have to show up with the money ready to go. This is typically demonstrated by a proof of funds document. Our investors make it possible for us (the manager and promoter of the syndication) to secure a very good deal that would almost certainly not be accessible to the investors if they were not part of a syndication team.
For this reason, our clients understand that we`ve created an opportunity fund where the investors team up with us, and provide us with the ammunition to go into the field ready to buy properties that we perceive are strong. In order to compensate the investors for their risk and their trust, we provide them with a preferred return seeing that they get paid first before the syndicator gets paid. We as the syndicator, pick the deals, and we share the profits with the investors " but only if they receive their preferred return first. Investors can see that we, the syndicator, have a very good incentive to pick strong performing deals with lots of upside.
In case the investor still does not feel comfortable because they don`t have control of the property picking process, we usually offer the following additional insights about working with us:
We usually suggest that the investor look at several other factors to help them decide whether or not they want to participate in the deal with the promoter. If they can`t look at the deals on a one-by-one basis, they probably need to look at the track record of the promoter and see what kind of deals he or she has picked in the past.
Further, investors who are sophisticated know that sometimes things go wrong. They understand that economies change, the buildings sometimes have problems that can`t be repaired, and they understand that sometimes, insurance companies don`t pay on claims as expected. However, what they don`t understand is lying, cheating, stealing, and other forms of dishonesty. So any investor is encouraged to evaluate the credibility of the syndicator/promoter. That means that the investor should look into potential legal issues that might exist in the background of the promoter. A clean record is very important.
Further, the investor is encouraged to ask as many questions as possible up-front so they can become very comfortable with the investment and with the opportunity that`s being presented. We encourage investors to invest time to get to know us " and we invest time to get to know them. After all, we will all be on the same team for some time into the future.
At the end of the day, the investor has to decide whether they want to be onboard or not. At the end of the day, the decision is a personal one and generally an emotional one for individual investors because there is a high level of trust between the syndicator and the promoter.
Creating the business relationship and the bond with the investor is central to any successful syndication it`s a process that we focus on in our Deal Making Symposium and Syndication Seminar program. This is why "the investor" is the primary focus of our program. We focus on how to sell the deal to investors and how to create a bond to successfully raise capital. We hope to see you in the near future at an upcoming program.
* * *
If you have an opinion or thought on this topic, please write a comment on my website. Share this article with your friends. Thank you for being one of our loyal readers. We appreciate you and are rooting for your success. Often dubbed a "Growth Architect" by his clients, Joel Block advises companies on explosive growth strategies by driving revenues and sales. Well known in the capital markets, Joel is a successful entrepreneur, speaker, advisor and is an astute investor.
Joel is CEO of Bullseye Capital , a full-service real estate company supporting owners and buyers of real estate assets with brokerage, leasing, property management, and mortgage services. Joel is also the founder of the Bullseye Capital Real Property Opportunity Fund, LLC which is an investment company that acquires distressed real estate by working with accredited investors.
A leader in real estate syndication, we offer seminars to assist others in acquiring the skills needed to raise syndicate capital to acquire properties. Imagine knowing how to pool funds to purchase any real estate investment, whether single family, multi-family, commercial, or anything else. For more information and complete details, please go to http://www.syndicatefast.com/