An Ignoble Experiment: Red Flags in the Evaluation of Real Estate Opportunities

Dear Investor,

In this month's article, Mortar Group is explaining some of the common warning signs that can help any investor quickly evaluate an offering or investment. More specifically, what to be on the lookout for when evaluating a sponsor – or what potential 'red flags' would look like.

The Red Flags of Real Estate Syndications….

When analyzing any new sponsor or manager – whether it's a syndication, real estate fund or any other investment, due diligence is a must. Whether an investor is choosing between a large institutional fund or a small local deal – don't miss this important step and watch for red flags.

By way of disclosure, we have an advertising relationship with Mortar Group, meaning we get paid for making this introduction and sharing this content. As always with these types of deals, consider this an introduction and not a recommendation. Every deal is unique and the responsibility to vet any and every deal you invest in still lies with you. This opportunity is available to accredited investors only.

Red Flag #1 – Sponsor Market Presence

Real estate is a local business, and a sponsor should be an expert in the local market. Deal metrics and investment variables vary greatly from city to city – or state to state. This doesn't mean a sponsor should only invest in one city, but it does mean that the team must have local knowledge.

A sponsor with no local knowledge or only relying on Google data searches should not satisfy an investor. A sponsor should understand local dynamics – geography, gentrification, and pricing history, as well as understand local building codes, and also have access to local consultants or contractors.

A boots on the ground approach by a sponsor shows they'll be able to handle the day to day responsibilities with taking a project to exit smoothly and profitably.

Red Flag #2 – No Track Record

One of the most important things to look for when evaluating a potential sponsor is whether or not they have experience and a track record. A sponsor should be able to share a track record and their experience on other investments they have completed. One should also ask how the sponsor performed in various parts of the market cycle – in times like the crash of 2008 or during unforeseen events such as Covid. It's much more likely that an experienced sponsor will be successful or better protect capital when the market is volatile or is in a downturn. Also, it is important to not only understand the hits but also the misses and one can only do that with a track record and careful digging.

Red Flag #3 – Part-time Sponsor

A sponsor offering an investment should be in the business you're investing in full time. They should have an office you can visit, a website with an investor portal, and a team dedicated to managing investments.

Part-time sponsors we come across are usually someone just starting out (as all sponsors were at one point) – but those investments should be funded individually or by friends and family – until that sponsor establishes a track record and makes investments their full-time business.

Red Flag #4 – No Preferred Return

Most deals you see with established sponsors have a preferred return or interest distribution. The preferred return is usually a set amount or interest paid to the investors / limited partners before any splits or profit is shared with the manager. Ideally this keeps everyone's interest aligned. It makes investors feel more comfortable, and it incentivizes a sponsor to outperform so they can share in the backend gain. A sponsor that doesn't provide a preferred return is telling you that they're not confident in that deal and are just looking to make money off the fees.

Red Flag #5 – No Skin in the Game

This is an important question, and one of the first that comes up often with potential investors. The sponsor should be investing a significant amount of their own capital along with the investors or should be providing some sort of guarantee on the senior debt. A partner having 'skin in the game" ensures that all parties are aligned to have the same successful outcome on a project.

Simply put - a sponsor will fight harder to ensure an investment's success if they have something to lose and not just make money off the fees for a particular deal.

Red Flag #6 – Unresponsive Investor Communications

Communication is often overlooked, but it is essential to a successful sponsor / investor relationship. Managers should provide timely and accurate communication or reporting because there is nothing worse than being in the dark and not knowing where your investment is at, or how it's doing. Investors should ask for sample reports from sponsors of recent deals and make sure they are delivered quarterly.

Another aspect is how is the information available, or where is it kept? Does the manager have an investor portal that is secure, where investors can have access to all their documents when they need them?

Every sponsor will have different answers to some of these red flags, but here is a sample of how Mortar Group would address these questions.

Red Flag #1 - Sponsors Market Presence

They are New York based, and that is where they work. They have in-depth local neighborhood knowledge, and focused opportunities that utilize their intimate knowledge of New York's prime niche neighborhoods. This is Mortar's bread and butter.

Red Flag #2 – Track Record

With over $420M in gross sales since 2001, Mortar has been involved in over 30 offerings in New York. They have an established track record, and have a team well versed in New York real estate. At Mortar, not only do they provide their track record but they also provide case studies, which allow investors to understand the nuances to specific deals rather than just the data.

Red Flag #3 – Part-time Sponsor

Mortar has full-time staff managing all active investments and a team dedicated to investor relations. With over 400 active investors, Mortar also has two offices (one in New York, and one in New Jersey), and a website and investor portal where investors can view how their investments are doing 24/7.

Red Flag #4 – No Preferred Return

Every offering Mortar Group launches has a preferred return dedicated to the limited partner and passive investors.

Red Flag #5 – No Skin in the Game

Interests are aligned in Mortar's offerings. Mortar targets a 10% equity investment in each offering along with guarantees on the debt side by the principal.

Red Flag #6 – Unresponsive Investor Communications

Mortar has a team dedicated to investor relations. They often meet with investors locally, offer tours for visiting investors, and any email or phone inquiry is responded to within 24 hours. Separately, they have a secure investor portal where investors can view quarterly reports, offering financials or obtain their tax information at any time.

At the end of the day – investors should understand where their savings or investment is going. The money being invested is hard earned, so you need to be comfortable with whom you work with, and that the sponsor will do what they say they will do.

Now Live!

Mortar's new investment, the MG East River offering, is open and accepting new commitments. Sign up to their mailing list to learn more about this New York based Value-Add offering, or if you would like to learn more about what they do.

Following the value driven principles they have used since 2001; Mortar is providing this opportunity to investors by targeting small to mid-cap distressed assets located in some of New York's best neighborhoods.

While navigating a challenging interest rate market, select NYC submarkets continue to experience high and stable growth during the last few years. MG East River looks to capitalize on these market dynamics and is expected to provide investors with the excellent opportunity to capture outsized demand in thriving locations with strong local demographics.

In under 36 months, MG East River is projected to deliver a high Cash on Cash Return at exit, with a quarterly distribution targeting over 7%. Mortar believe these opportunities represent some of the highest risk-adjusted returns in the current environment.

View the MG East River offering here.

Projected IRR: 21.13% Equity Multiple: 1.62

This content has been shared by Mortar Group. If you're interested in discussing this topic more, or you are interested learning more about Mortar Group, you can schedule a call here: Schedule a Call

Also feel free to view other recent resources from Mortar Group.

Mortar believes in experience and smarter real estate investing. Their fully integrated in-house design, development, and asset management expertise has resulted in dozens of successful privately syndicated deals. This, combined with skin-in-the-game co-investments and in-depth local neighborhood knowledge, helps Mortar mitigate risk and maximize investor returns. Focused opportunities combined with an intimate knowledge of New York's prime niche neighborhoods allows investors to diversify and deploy capital conservatively in projects and divest risk throughout the real estate lifecycle.

Mortar Group extends white coat investors access to exclusive opportunities on new offerings. If you would like to know more, please visit their website, or reach out to Harmeet Bindra via phone or text at 703-599-0813 and bindra@mortargroup.com.