Real estate private placements can be analyzed logically, but, unfortunately, there are no absolutes.
The right way to look at a transaction is to look at the whole cloth, avoid isolating specific terms or features, and determine whether your investment objectives may be met by the quality and nature of the real estate involved.
All real estate transactions have flaws. It's always easier to turn down a deal than it is to invest in it. Ultimately, you will develop your own set of "deal breakers."
The PPM Evaluation Checklist starts with an analysis of the PROPERTY- the asset(s) QUALITY and VALUE. Then, we take a look at the qualifications of the people involved, the sponsor organization (syndicator, lead partner) and managers, if any.
The SPONSOR section of the PPM Evaluation checklist represents the minimum amount information you should verify [if you have time, consider substituting the more comprehensive Sponsor Evaluation Checklist found just below in lieu of this section].
Next, after examining the TERMS and FEASIBILITY sections of the projections shown in each memorandum, your goal is to translate this data into risk-adjusted, economic value calculations (again, based on pro-forma data) that can then be compared with other investments.
The purpose of the Sponsor Evaluation Checklist is to shed light on how the sponsor organization is structured and how they operate, or intend to operate, the real estate partnerships they sponsor:
• Methods the sponsor uses to make real estate investments
• Size and scope of operations compared to personnel
• Solvency and liquidity of the sponsor
• Independent third-party relationships with firms that the sponsor generally deals
The Checklist will help you solicit and organize the minimum information on sponsors necessary to make sound investment decisions. In addition, you'll get a good idea how efficient the sponsor is by the nature and timeliness of their response to the items on the Checklist.
Learning more about how the sponsor's organization actually functions has become more important than ever due to the rapidly increasing scale of operations of many real estate private partnership sponsors, along with the sheer number of new sponsors that have joined the industry that have little, or no significant track record.
The Checklist shows you how the sponsor organizes and plans their business, as well as how they have handled unexpected changes in the past, if applicable.
Note: The Memorandum only reveals the static condition of the sponsor - a snapshot of an organization at a point in time. Also, the terms of most memorandums allow the sponsor wide latitude in the conduct of operations. The reason: so the sponsor can perform freely without undue restriction in the future. The data gathered as you undertake the Sponsor Evaluation Checklist will provide a more complete understanding of what an investor should expect when "signing up" as a passive, or "limited" partner.
A final note about using both the Checklists. While conducting due diligence, don't assume or otherwise take appearances for granted. Always ASK.