Goddamn syndicators: Part Deux
I regularly take shots at the syndicator crowd, and LPs often say to me, "OK, well, how am I supposed to know these people are ripping me off?"
It's a fair question. Today, we're gonna examine a current offering from Rise48. Buckle the fuck up.
I regularly take shots at the syndicator crowd, and LPs often say to me, "OK, well, how am I supposed to know these people are ripping me off?"
It's a fair question. Today, we're gonna examine a current offering from Rise48. Buckle the fuck up.
Grab some coffee, gin, and your favorite huffing glue; this is gonna be a long one. My magnum opus. Bookmark and refer to often.
First, some ground rules. I don't know anyone at Rise48 or Cochran Capital (more on them later), and I don't care enough about these people to get into a legal battle.
I assume that what I write will make its way to one of them, and it will piss them off. To that end, we are going to stick to the facts as presented on the offering documents, and the questions I would as if I were a potential LP.
I don't have a high opinion of these types of operators. They prey on retail investors with the swan song of "passive income" and "double your money in five years while we do the work." Many of these investors can't afford to lose the 50k-100k they are investing. Our dollar buys less today than it did five years ago, and you can't blame people who feel stuck looking for a way out.
Not every syndicator is a scumbag, not every Rise48 deal sucks. I'm going to teach you what little I've learned over the years so perhaps you can make an informed decision about investing in a multifamily syndication.
GPs are selling a product (returns) to customers (LPs, you) so it's fair to ask questions about the product you're buying.
And last but not least, I've never raised a dime on Twitter and I don't have any use for retail capital. The size deals we buy don't syndicate well. Consider this probono work. All I ask that you share this knowledge with someone who may be considering an investment.
First, some ground rules. I don't know anyone at Rise48 or Cochran Capital (more on them later), and I don't care enough about these people to get into a legal battle.
I assume that what I write will make its way to one of them, and it will piss them off. To that end, we are going to stick to the facts as presented on the offering documents, and the questions I would as if I were a potential LP.
I don't have a high opinion of these types of operators. They prey on retail investors with the swan song of "passive income" and "double your money in five years while we do the work." Many of these investors can't afford to lose the 50k-100k they are investing. Our dollar buys less today than it did five years ago, and you can't blame people who feel stuck looking for a way out.
Not every syndicator is a scumbag, not every Rise48 deal sucks. I'm going to teach you what little I've learned over the years so perhaps you can make an informed decision about investing in a multifamily syndication.
GPs are selling a product (returns) to customers (LPs, you) so it's fair to ask questions about the product you're buying.
And last but not least, I've never raised a dime on Twitter and I don't have any use for retail capital. The size deals we buy don't syndicate well. Consider this probono work. All I ask that you share this knowledge with someone who may be considering an investment.
Now, with that shit out of the way, lets start the fun.
If you want to follow along, you can download the deck here and we will go page by page. This is a current offering in the marketplace, not some deal from three years ago. It's happening right now.
I didn't sign a CA to get this, it was sent to me as an anonymous link.file.io/OQjrzR577vNd
If you want to follow along, you can download the deck here and we will go page by page. This is a current offering in the marketplace, not some deal from three years ago. It's happening right now.
I didn't sign a CA to get this, it was sent to me as an anonymous link.file.io/OQjrzR577vNd
First page:
The sponsors are Rise48 and Cochran Capital. Rise48 is the GP and Cochran is syndicating the LP position.
The next few pages are disclaimers and bios on the principals. Page 8 is the next useful page.
The sponsors are Rise48 and Cochran Capital. Rise48 is the GP and Cochran is syndicating the LP position.
The next few pages are disclaimers and bios on the principals. Page 8 is the next useful page.
Page 8:
Cochran is aggregating capital from wealthy people looking to invest in real estate. A common practice. Aggregate small dollars and buy into big deals.
For this service, Cochran charges a 2% acquisition fee on raised equity, plus 50bps per year for a management fee. Perhaps you think that's worth it, but that's not the only fee level. Now look, you may only have 50k to invest (Cochran's minimum) and getting access to larger deals feels worth it to you, so you're ok with this fee load. I wouldn't be, but I'm not the target consumer.
One other thing that stands out. If the org chart is correct, Rise48 is only putting in 0.5% of the equity. That feels low to me, but perhaps I'm wrong about syndications. I would ask the GP (Rise48) why they aren't putting more of their cash into the deal if they're so excited about the opportunity.
Cochran is aggregating capital from wealthy people looking to invest in real estate. A common practice. Aggregate small dollars and buy into big deals.
For this service, Cochran charges a 2% acquisition fee on raised equity, plus 50bps per year for a management fee. Perhaps you think that's worth it, but that's not the only fee level. Now look, you may only have 50k to invest (Cochran's minimum) and getting access to larger deals feels worth it to you, so you're ok with this fee load. I wouldn't be, but I'm not the target consumer.
One other thing that stands out. If the org chart is correct, Rise48 is only putting in 0.5% of the equity. That feels low to me, but perhaps I'm wrong about syndications. I would ask the GP (Rise48) why they aren't putting more of their cash into the deal if they're so excited about the opportunity.
Page 9:
Rise48 is taking 28% above an 8 pref. Meaning, you get your money back plus and 8% return on that money before Rise gets a penny. Except, for a group that is only putting in 0.5% of the equity, taking 28% of the promote seems very out of market, to me.
One other thing. The 50k minimum investment that Cochran charges is the exact same minimum that Rise48 charges. So, why are you paying fees to Cochran to get access to an investment you could get directly from Rise48?
Me looking at Cochran:
Rise48 is taking 28% above an 8 pref. Meaning, you get your money back plus and 8% return on that money before Rise gets a penny. Except, for a group that is only putting in 0.5% of the equity, taking 28% of the promote seems very out of market, to me.
One other thing. The 50k minimum investment that Cochran charges is the exact same minimum that Rise48 charges. So, why are you paying fees to Cochran to get access to an investment you could get directly from Rise48?
Me looking at Cochran:
Page 10:
Something else that sticks out, though LPs may not think about it right away. If the cash on cash is low, and 5% is low, then the majority of the return on investment is coming from the sale. You need to really dig into the assumptions around the exit.
Because if they're wrong about the exit, your capital is very much at risk.
Moving on!
Something else that sticks out, though LPs may not think about it right away. If the cash on cash is low, and 5% is low, then the majority of the return on investment is coming from the sale. You need to really dig into the assumptions around the exit.
Because if they're wrong about the exit, your capital is very much at risk.
Moving on!
Page 11:
This shows potential cash flows for a 100k investment. I can't stress this enough; it is useless without understanding the inputs and assumptions. It's easy to say "Yay, twice my money in five years" but you have to understand the building blocks that yield that outcome
This shows potential cash flows for a 100k investment. I can't stress this enough; it is useless without understanding the inputs and assumptions. It's easy to say "Yay, twice my money in five years" but you have to understand the building blocks that yield that outcome
Page 14:
Talks about the strength of the supply chain and materials they use, but given that this deal is in Fort Worth, is it cheaper to ship product from Phoenix to Fort Worth than to simply buy tile/drywall in Fort Worth? Does Rise charge a fee for this service?
Talks about the strength of the supply chain and materials they use, but given that this deal is in Fort Worth, is it cheaper to ship product from Phoenix to Fort Worth than to simply buy tile/drywall in Fort Worth? Does Rise charge a fee for this service?
Page 19:
Talks about no capital calls and points to three-year interest rate caps.
Page 21:
Their current portfolio, 1.7B in acquisitions, was purchased less than three years ago, so I'm not sure how helpful those three-year caps are going to be soon.
I would ask to see current debt yields (NOI/loan balance) expressed as a percentage. Anything below a 10% DY would cause me to ask more questions about the plan to place new debt on the asset in a higher-rate environment.
Also, LTV at acquisition is a useless metric. I would ask about LTV at today's valuations. I assume some of these deals are worth less than the loan balance, so portfolio health would be one of my first questions.
Talks about no capital calls and points to three-year interest rate caps.
Page 21:
Their current portfolio, 1.7B in acquisitions, was purchased less than three years ago, so I'm not sure how helpful those three-year caps are going to be soon.
I would ask to see current debt yields (NOI/loan balance) expressed as a percentage. Anything below a 10% DY would cause me to ask more questions about the plan to place new debt on the asset in a higher-rate environment.
Also, LTV at acquisition is a useless metric. I would ask about LTV at today's valuations. I assume some of these deals are worth less than the loan balance, so portfolio health would be one of my first questions.
Page 22:
Track record. They've listed 11 deals here. I'm unsure if this is a sampling, or all they sold.
The IRR looks incredible for most of these deals. Two things stand out.
- These are some of their early deals. If you bought in 2019-2020 and sold in 2021-2022, you should have crushed it.
- These are really short hold periods, average of 17.7 months. A short hold period juices the IRR in a big way, but that's not the issue.
The issue, for me as an LP, is reinvestment risk. You haven't helped me if I give you my money and you give it back to me 17 months later. Now I have to find it a new home. Keep it for 5-7 years and deliver consistent returns. Perhaps you as an LP like shorter holds, but you'd be a bit of an outlier. Make sure the GPs time horizon matches your goals.
Track record. They've listed 11 deals here. I'm unsure if this is a sampling, or all they sold.
The IRR looks incredible for most of these deals. Two things stand out.
- These are some of their early deals. If you bought in 2019-2020 and sold in 2021-2022, you should have crushed it.
- These are really short hold periods, average of 17.7 months. A short hold period juices the IRR in a big way, but that's not the issue.
The issue, for me as an LP, is reinvestment risk. You haven't helped me if I give you my money and you give it back to me 17 months later. Now I have to find it a new home. Keep it for 5-7 years and deliver consistent returns. Perhaps you as an LP like shorter holds, but you'd be a bit of an outlier. Make sure the GPs time horizon matches your goals.
Page 23:
I know this deal because I passed on this deal. It's not a B+ property. It's rough, unrenovated shit built in 1986, that's not B+.
It's not an A+ location. I know because I own affordable housing in Fort Worth.
- average HH income is 77k in a 2 mile radius
- the average home value is less than 250k
- population growth has been slowing and trending negative.
Does that feel "A+" to you?
I know this deal because I passed on this deal. It's not a B+ property. It's rough, unrenovated shit built in 1986, that's not B+.
It's not an A+ location. I know because I own affordable housing in Fort Worth.
- average HH income is 77k in a 2 mile radius
- the average home value is less than 250k
- population growth has been slowing and trending negative.
Does that feel "A+" to you?
The overall sunbelt, 1980s built, secondary multifamily market has seen value destruction of more than 25%. So, buying at a 25% discount to what it would have traded for at the peak of the market doesn't feel like a deal to me.
They mention a "low basis of 133k per unit," but that's not a deal in this submarket, not with $1,250 rents.
Second, that's not their basis. That's an expression of the purchase price, but the basis is all dollars in. Their total capitalization is 55. 8M, so their all-in basis is 193k per unit. Does that sound like a good deal to you? It sure doesn't to me.
They mention a "low basis of 133k per unit," but that's not a deal in this submarket, not with $1,250 rents.
Second, that's not their basis. That's an expression of the purchase price, but the basis is all dollars in. Their total capitalization is 55. 8M, so their all-in basis is 193k per unit. Does that sound like a good deal to you? It sure doesn't to me.
Part of the business plan centers around renovating units to get a higher rent. I would ask two questions.
1. Does the renter who is willing to pay that higher rent want to live in this submarket? There is always a reason to live at your property, and it's often price.
2. Does a business plan centered around raising rents seem viable when the rent in the submarket and at the property has been going down?
1. Does the renter who is willing to pay that higher rent want to live in this submarket? There is always a reason to live at your property, and it's often price.
2. Does a business plan centered around raising rents seem viable when the rent in the submarket and at the property has been going down?
Page 28:
They're showing the cap rate as 4.99, but watch the slight of hand here. One, they are using T3 income, and two, they are using their proforma expenses. You should ask to see the T12, adjust for taxes at the sale, and then calculate the cap they're buying at.
They're projecting an exit at a 4.8 cap. Which feels oddly specific, but then I remembered they're showing a 15irr, so that makes sense.
- a 4.8 exit cap is 100bps inside of today's cap rates for the product. Why are you making an implicit bet on rate decreases?
- a 4.8 exit cap is to specific and tells me the sponsor is goal-seeking for a 15irr
They're showing the cap rate as 4.99, but watch the slight of hand here. One, they are using T3 income, and two, they are using their proforma expenses. You should ask to see the T12, adjust for taxes at the sale, and then calculate the cap they're buying at.
They're projecting an exit at a 4.8 cap. Which feels oddly specific, but then I remembered they're showing a 15irr, so that makes sense.
- a 4.8 exit cap is 100bps inside of today's cap rates for the product. Why are you making an implicit bet on rate decreases?
- a 4.8 exit cap is to specific and tells me the sponsor is goal-seeking for a 15irr
Page 30:
Despite a business plan centered around raising rents, they acknowledge that DFW rents have been declining. If I were going to invest in this market, I would need bulletproof conviction that raising rents was the correct business plan.
Despite a business plan centered around raising rents, they acknowledge that DFW rents have been declining. If I were going to invest in this market, I would need bulletproof conviction that raising rents was the correct business plan.
Page 32:
Help me understand why you are projecting 3% rent growth every year, on top of your unit upgrade rent increases, in a market that is seeing rent decline?
Help me understand why you are projecting 3% rent growth every year, on top of your unit upgrade rent increases, in a market that is seeing rent decline?
They are targeting a $161 rent increase (page 48) and spending $16,500 per unit to get there. That's a roughly 12% return on cost.
I look for a return on cost that is equal to or greater than my projected IRR, but perhaps I'm greedy.
I look for a return on cost that is equal to or greater than my projected IRR, but perhaps I'm greedy.
Page 37:
A little footnote with an * says the CM fee is paid by the lender. That's not true. The lender doesn't simply say "hey guys, great work, here's some of our profit."
The CM fee is underwritten as part of the construction costs and baked into the loan. It's then paid out as the work is completed. So while the lender is cutting the check, they're using LP capital to pay it.
The deal always pays the CM fee, never the lender.
A little footnote with an * says the CM fee is paid by the lender. That's not true. The lender doesn't simply say "hey guys, great work, here's some of our profit."
The CM fee is underwritten as part of the construction costs and baked into the loan. It's then paid out as the work is completed. So while the lender is cutting the check, they're using LP capital to pay it.
The deal always pays the CM fee, never the lender.
Page 39:
They're using floating rate debt and buying down the rate to get to 4.75%. Buying down the rate can make a lot of sense for the right deal. I'd like to know what the 1 year extensions cost.
They're using floating rate debt and buying down the rate to get to 4.75%. Buying down the rate can make a lot of sense for the right deal. I'd like to know what the 1 year extensions cost.
Page 43:
The average unit size of 713 sqft seems small for Texas multifamily. I'd like to understand the rent comps better because Texas isn't NYC, and people have plenty of big units to choose from.
Ask yourself this simple question: If I'm a renter, would I choose to live here in this 713 sqft unit or at one of the comps? You are the end consumer in many respects, so think like a consumer.
The average unit size of 713 sqft seems small for Texas multifamily. I'd like to understand the rent comps better because Texas isn't NYC, and people have plenty of big units to choose from.
Ask yourself this simple question: If I'm a renter, would I choose to live here in this 713 sqft unit or at one of the comps? You are the end consumer in many respects, so think like a consumer.
Page 50: oh boy!
Two things stick out to me.
1. The acquisition is 3% of purchase price. Rise48 can do what they want, but I could never get away with that in the institutional world. Also, does this fee seem fair when, as you recall, they are investing 0.5% of the equity?
2. These lender origination fees are very high. Most charge 1% of the loan amount. So, these are 2M high. They don't appear to be reserves or rate buy-downs because those are accounted for elsewhere. So, at the risk of sounding like an idiot, what the fuck is happening here?!
Two things stick out to me.
1. The acquisition is 3% of purchase price. Rise48 can do what they want, but I could never get away with that in the institutional world. Also, does this fee seem fair when, as you recall, they are investing 0.5% of the equity?
2. These lender origination fees are very high. Most charge 1% of the loan amount. So, these are 2M high. They don't appear to be reserves or rate buy-downs because those are accounted for elsewhere. So, at the risk of sounding like an idiot, what the fuck is happening here?!
Page 51:
I'm not going to pick apart expenses, every operator does things differently. Instead, I'd like you to focus on the exit NOI and the implicit assumptions.
- exit NOI of $3,221,302
- projected exit cap of 4.8%
- projected sale price of 67.1M
- exit price per door of $233,022
Now, in better DFW markets, I can buy brand new construction for 225k-250k per unit. Today. So, does it make sense to you that a 1980s built deal in an average suburb would trade for 233k a unit in five years? It doesn't make sense to me, but I'm just an anonymous mallet.
Ask yourself, with every assumption you make, does this feel true to me?
"What is true?" is the question I ask around the office all the time, and you'd do well to ask it of yourself before investing in anything.
I'm not going to pick apart expenses, every operator does things differently. Instead, I'd like you to focus on the exit NOI and the implicit assumptions.
- exit NOI of $3,221,302
- projected exit cap of 4.8%
- projected sale price of 67.1M
- exit price per door of $233,022
Now, in better DFW markets, I can buy brand new construction for 225k-250k per unit. Today. So, does it make sense to you that a 1980s built deal in an average suburb would trade for 233k a unit in five years? It doesn't make sense to me, but I'm just an anonymous mallet.
Ask yourself, with every assumption you make, does this feel true to me?
"What is true?" is the question I ask around the office all the time, and you'd do well to ask it of yourself before investing in anything.
Page 55:
Some more sleight of hand. They talk about having 3.6M of cash reserves as though they're responsible stewards of capital, but there's more here.
These look like operating deficit reserves that the lender is insisting on because they're worried about the property's ability to service the new debt. No one on earth gives lenders reserves to hold simply because they're cautious investors.
If the lender is saying, "This is some risky shit; give me 3.6M as security," you might want to ask yourself if all that extra risk is worth the 15irr. It isn't to me, but I'm a greedy mutherfucker, I guess.
Some more sleight of hand. They talk about having 3.6M of cash reserves as though they're responsible stewards of capital, but there's more here.
These look like operating deficit reserves that the lender is insisting on because they're worried about the property's ability to service the new debt. No one on earth gives lenders reserves to hold simply because they're cautious investors.
If the lender is saying, "This is some risky shit; give me 3.6M as security," you might want to ask yourself if all that extra risk is worth the 15irr. It isn't to me, but I'm a greedy mutherfucker, I guess.
Saving $50,000 to invest is really hard. Be careful who you give your hard-earned money to, and ask a lot of questions.
Let "what is true" be your north star and be careful out there, mutherfuckers.
Much love,
Marlo
Let "what is true" be your north star and be careful out there, mutherfuckers.
Much love,
Marlo
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