Passive Real Estate Investing as an LP - Top 5 Questions - Ep.8

On this episode Stephen provides an overview of 5 important questions to ask when considering an investment into a real estate partnership as a Limited Partner (LP).  

  
About Stephen:  
  
Stephen Simpson is the Founder and Principal of Focus Developments – a Real Estate company investing in quality industrial properties throughout Ontario. Focus provides Accredited Investors an opportunity to invest passively in industrial assets for long term growth and diversification. Stephen has over 20 years of experience in real estate, financial analysis, construction, and engineering. He has led teams delivering Commercial Real Estate and Infrastructure projects worth over $100M during his career. Stephen is a licensed Professional Engineer, an experienced Project Manager, and has a Diploma in Urban Land Economics from the Sauder School of Business at UBC. As Principal of Focus Developments, Stephen executes strategy, investment analysis, and oversees acquisitions and asset management.  
  
Connect with Stephen:  
  
Web: focuscapital.ca  
LinkedIn: linkedin.com/in/stephenrsimpson/  

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Listen on your favorite Podcast Player: www.buzzsprout.com/2358487   

Web: focuscapital.ca  

Transcript

0:11

Hi guys, Stephen here. Welcome to the Focused Capital Podcast. I wanted to record this episode just talking about questions that you as an investor, as a potential limited partner should be thinking about when considering a prospective real estate investment. So really the scenario I'm talking about is someone who is considering Investing in a larger, let's say commercial real estate deal as a limited partner and you're evaluating information that let's say a general partner or a real estate syndicator has provided to you as a summary or as a snapshot of what this particular investment is going to be about. So I wanted to give you five questions. That I think you should consider and I think you should discuss with with the general partner or who's ever presenting this information to you for this for this particular real estate investment. Now, typically the basics are going to be provided to you. Your internal rate of return or an overall return on investment, a whole period, the minimum investment amount some simple financial metrics are typically going to be provided to you to consider as part of this particular investment. And then you're going to have some back and forth and you're going to, maybe weigh this or consider this against other investment options that you have in the market. Real estate especially on the commercial side, when you're dealing with bigger real estate investments there's lots more, there's lots more things that the general partners typically completing and managing and doing on your behalf. So I think it's important to, not necessarily become an expert in all these things, but have some awareness of them. And as an investor, you can make better decisions if you're a little bit more aware of, what's going on behind the scenes. And again it's not so you can necessarily micromanage the general partner or the real estate syndicator that you're working with, but it's more just to help you under, have an understanding and make better investment decisions along the way. So I'm just going to run through these five five Sort of questions and sort of themes and topics to think about and my hope is that it'll help you have a better understanding and ask some better questions when you're evaluating these these real estate investments going forward. 1 of the questions I think you should ask is about risk. Typically, there are risks involved with any investment. So getting an understanding of these risks up front is, I think is key as an investor or as someone who's considering entering into any type of new venture, right? So ask that question about what are the risks and has a risk assessment been completed for this particular project, this property, this acquisition, whatever it is you're looking at, and a professional real estate general partner will have a sense of what the risks are for this particular investment. They're going to be understanding if there's risks associated with vacancy or with the market or with interest rates, or with any number of things that might be part of this particular project or property that they're taking on. Now, when I say risk, some people get their backs up and they think, Oh, geez, that's, it sounds risky. The truth is there's risk in any type of investment any type of venture that you're going to take on. And so the key is not necessarily to just shy away from the word risk, but really to get an understanding of, um, how those risks are being understood how they're being documented and also how they're being mitigated and managed going forward because risk. Management is really what you should be concerned about. If there's a risk as part of the project, but there's some way to handle it. There's some insurance policy you can get. There's a training, there's resources that you can bring on to the project and the risk is mitigated, then that's that's a reasonable solution to that particular problem, right? So really this question is about what the risks are and then how those risks are being handled by the by the general partner going forward, right? So getting a good understanding of that. The second question I would be asking is about the appraised value. So when, especially when looking at more complicated real estate projects there's going to be this sense of a purchase price. There's going to be some, money spent typically on closing costs, and then there's obviously, depending on the business plan, there's going to be costs associated with executing your redevelopment or, additions onto the property renovations, whatever it is that that the business plan entails. And so asking the question about appraised value and, Are the costs associated with the business plan going to be resulting in a higher appraised value? And if not immediately, then what is the plan to get that? Appraised value or that end result up in terms of what the property is going to be worth. So I think it's important again, not to understand all the minutia of that, but really to get a sense of, okay acquisition might be, let's say a million dollars, several hundred thousand dollars spent and closing costs and renovations and X, Y, Z and on. But at the end of it, where, what is the appraised value? What's the end result? And really just having a sense of. What some of the costs are that are going in. And then obviously what that what that appraised value is on the exit of that, and that again, that appraised value could be result of finishing all these types of projects or these renovations and things like that, but just having a basic understanding of, okay, if I'm spending X or is, or if the partnership is spending X on, on, acquiring and developing this property, what is that end result going to be? And really just, having a. Sort of a summary view of that. I think the next question is. Maybe obvious, but I think it's one that's important. And it's really about how that general partner is getting compensated. So what are the fees? And sometimes that's, presented very plainly in terms of, what general partner or syndicator is getting compensated as part of the deal. But I think I raised the question because it's something that. Limited partners and investors need to be thinking about in terms of wanting their general partner to be compensated properly as part of this deal. And the reason you as an investor want your general partner to be compensated is because you want them to have incentive to do well in this, on this particular project. So having a sense of, not only are there fees and maybe what percentage they are, but, you Is there an acquisition fee? Is there an asset management fee? Is there an asset disposal fee? And tying those back to the incentives that will allow that general partner to execute on this project? And I think as an investor having a sense of those fees. And having a sense of, how these large scale commercial real estate projects are rolled out is really beneficial because again, this is a partnership, typically speaking, if you're dealing with a limited partner, general partner. Type type setup for a commercial real estate project. And so you want the parties to be incentivized. You want it to be very clearly stated what the fees are and having a sense of, okay what are the milestones and what are the trigger points for each party to get compensated in various scenarios. So again, asking those questions about the fees and then what are the incentives and then how are those fees rolled out To the parties going forward. I think the fourth question really again, might, another one that might be obvious, but it's about the history of the property. So a lot of times we focus on the the business plan for the property and execution going forward, but when you're entering into a new property acquisition, you really want to have a sense of, what the history of the product is. property was, especially when you're dealing with commercial real estate and specifically industrial real estate, having a sense of, has the general partner looked into the history, have there been environmental reports completed? What are the mechanical systems, is there a clean bill of health essentially for this particular property that will allow you to have that sort of You know, base to go forward from to execute your your business plan. So I think just having a sense of what the history property of the property is, is. Are the buildings on the property 10 years old? Are they 50 years old? What were they used for before? Just asking some very simple questions about, is this a brand new building? Is it relatively new? Have there been additions? Quick questions to just get a better understanding of what it is you're investing in. And again a reputable general partner, reputable syndicator will have these sort of questions answered already. They'll probably have multiple reports documenting, the history of the property and things like that. And this ties back to, that first question we talked about with risks, if there are any risks that should be uncovered at that point. But again, I think it's important just to have very. Just a very sort of summary understanding of the history of the property and, if there's anything there that that would affect the investment on the loss. And then I think the last question out of these outta these five that investors should be asking is what is the the plan for managing the property? So a lot of times we assume. Um, that property manager is going to be hired. There's going to be, regular visits to the tenants. There's going to be collection of funds. There's going to be reports produced and things like that, but I would take the time to just. Ask some basic questions about the general partner's role and then also if they're not specifically doing the property management, maybe they're acting as an asset manager and then what is their relationship with the property manager and what's the sort of strategy in the plan to manage the tenants to make sure the financials are. Being handled properly what's the plan for vacancies of those happen to come up building maintenance, things like that. Again, Not getting into all the minutiae, but asking just some basic questions under each one of these themes to just to get a better understanding with smaller bay industrial properties, for example, which, we invest in these tend to be small business tenants and, they're the ones paying the rent. And there needs to be a good understanding of, what they need out of the property. What are their requirements? And so I think it's important to ask the question of the general partner, what's your plan to manage those types of tenants? Is there a certain strategy where you've, you've got certain. Touch points throughout the year that you're managing these tenants in a certain way. How are you incentivizing to either stay at the property to increase rates? How are you managing your leases and things like that? Again, it's important to just get an understanding of what the plan is and a reputable operator will have these questions, will have answers for these questions and be able to, confidently tell you, Hey, this is our experience. This is what we're seeing. This is why we do this. We've got, we've already asked these questions. We've got answers, we've got reports, and we've got some some plans moving forward. And again, These aren't the only five questions, but I think these are five that I've seen that, maybe not all investors are asking based on, whatever pitch deck materials are getting from from the general partner. But I think it's important again, to to get a good understanding of these things. Use them as a a reference point for your investments going forward. So I hope that helps. If you have any more questions or want to get a sense of what we're up to here at focus Developments and Focus Capital, I encourage you to visit our website@focuscapital.ca. Have a look at our projects, have a look at our free resources and guides, and hopefully those will help you going forward. Bye for now. Hope you got some value out of this podcast episode. I invite you to like and subscribe to the podcast, leave a review, leave a comment. Let us know what you think. And for any other information about us, what we're doing and the types of investments we're into, please visit focuscapital. ca, focuscapital. ca. And on there, you can find a ton of information, additional podcasts and a lot of free resources. That's it for this podcast episode. Bye for now.