How to Analyze a Deal: Looking Beyond the Numbers
As the real estate market has continued to improve, there has been a proliferation of real estate “deals” from syndicators and developers looking to provide benefits for themselves and to their investors. These investments are typically structured as limited liability companies (LLC’s) or limited partnerships and can involve multifamily housing, industrial, retail, office, self-storage, medical, hospitality and any other types of property (including raw land). ORBA’s Real Estate Group often assists clients with structuring transactions to attract new investors, as well as investors who look for assistance with evaluating the quality of potential investments. Thus, it is important to know what to look for when reviewing a new deal. The factors that we focus on are as follows:
- Who is the promoter? Have you heard of him/her and what is his/her reputation?
- Where is he/she located? Is the property in the same location such that the promoter knows the market?
- What is the track record of the promoter? Have they put together similar deals?
- Have they been successful with this type of property and in this location?
- Do they have “skin in the game”? Or, are they merely the manager/general partner collecting up-front fees and getting a piece of the back-end appreciation or are they also investing their own dollars into the project?
- Where is the property located? What are the demographics of the surrounding area?
- What type of property is it? Is there a need for this type of property in the area?
- Who is the competition? Is the market over-saturated?
- Is the area growing? Is it supported by industry, education, etc.?
The Economics of the Deal
- What are the expected cash flows, tax consequences and rates of return, and are these appropriate for the amount of risk in the deal?
- What is the split between the investors and the promoter? Are there preferences, are they cumulative, are there claw-backs if the deal is not as successful as projected, etc?
- Is the promoters’ return on investment dependent on the future success of the property or is that risk eliminated by large up-front fees?
- Is the project highly leveraged and what is the type and quality of the financing?
- What is the expected time period for the investment and is that consistent with an investor’s need for the cash?
- What is the complexity of the deal? If it is too vague or broad or is hard to understand, that should give you pause.
- Are the expected returns too good to be true?
Real estate can be a very lucrative investment for both a promoter/syndicator and an investor. Returns can be very good, and often, the investment has substantial tax advantages. From an investor’s point of view, real estate should be part of a well-diversified portfolio. However, these deals are illiquid investments that carry varying degrees of risk. Therefore, before making such an investment, make sure you understand what you are getting into.
The ORBA Real Estate Group has a wealth of experience helping to structure these investments, as well as analyzing potential deals. If you want to look beyond the numbers, please contact Jeff Newman or call your ORBA advisor at 312.670.7444.