WS1973 Strategic Investing as an LP | Highlights Aleksey Chernobelskiy

Are you considering real estate syndication as a path to building wealth? It offers exciting opportunities, but also comes with crucial decisions for Limited Partners (LPs). A common point of concern: capital calls.

In this episode of the Real Estate Syndication Show, we bring you expert insights from Aleksey Chernobelskiy to help you navigate capital calls with confidence. Aleksey's guide for LPs on capital calls stresses assessing available funds, understanding legal implications of non-compliance, evaluating investment performance, and confirming it's the final call. He highlights the necessity of thoroughness and asking insightful questions to make informed decisions.


Here are some key takeaways:

• Make Quick, Informed Decisions: Respect the General Partner's (GP) time by asking insightful questions to understand the deal's risk-reward profile. Utilize Aleksey's recommended exercise to streamline your decision-making process.
• The LP-GP Relationship Matters: A positive relationship between LPs and GPs is essential for success. Happy and motivated GPs lead to better outcomes for LPs. Remember, GPs manage numerous investors. Do your due diligence before engaging with a deal to expedite communication.
• Avoid Common Mistakes: Don't base decisions solely on isolated factors like preferred return (PREF) or profit splits. Take a holistic approach and evaluate the entire deal structure to avoid common LP pitfalls.

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Transcript

Whitney Sewell: This is your daily real estate syndication show. I'm your host, Whitney Sewell. Today, we've packed a number of shows together to give you some highlights. I know you're going to enjoy the show. Thank you for being with us today. One thing I wanted you to be able to elaborate on, you talked about, you know, quickly decide, right? You know, if something fit or not, even appreciate how you said, you know, how to be nice to the folks on the other side, right? Not every deal is going to work, but even respecting their time, like, what are the questions that we need to know about this opportunity? That's going to help you understand that risk reward, you know, ratio there. you know, how about we dive into that exercise a little bit. I'd love to know, uh, you know, I know the listener, I probably called the listeners attention as well. You know, the exercise that helps you do that. Uh, and then I know there's a number of things we're going to, or a few other things we're going to talk about, but thankfully we have Alexa for a couple of segments here at least. Um, and so the listeners know, but elaborate on that, the exercise, right. Uh, and, uh, you know, so you can make some of those decisions, uh, quickly.

Aleksey Chernobelskiy: Sure, so I'll tell you two things. First, there's a reason why the exercise I think is important. Even though I advise LPs, I think LPs would not be in a good place without happy GPs and incentivized GPs, both from a fee structure and a promote structure. Now, you know, something I firmly believe in is being able to ask questions and the idea that if you're not getting good responses, then you should not feel pressured to sort of give in and just invest. The flip side of that is also really important because LPs need to be sensitive to the fact that, you know, GP has many investors and all types of investors are asking different types of questions. And so, you know, you sort of need to do your homework before, A, before realizing whether you want to ask questions or not, right? In other words, many times you'll look at a deal and you'll just know that it's not for you, whether that's because there are way too many questions and sort of like the probability of getting good answers is low, or perhaps it just doesn't meet your goal. For example, if someone, you know, wants a cashflow deal and this is a development and cashflows won't start for a few years, So like, you can just pass immediately and not ask them any questions about the deck, right? And I mean, that's just a simple example, but there's many sort of similar, but not as extreme examples that apply. So just to start the conversation, I think it's important to be sensitive to both sides. In terms of the actual conversation, what I think a part of the discussion today will, I think, be an article that I put out, which is called the top 15 syndication mistakes. What I would recommend that everyone do, and the reason why I put this together was I sort of, I see the good and the bad from the LP side. When you see a deal go sideways, you can almost always go back to the original deck, to the original model. discern the questions that you could have asked, but didn't. And I'm not talking about, you know, predicting COVID or something crazy like that. But there are certainly things that should have been in your due diligence that weren't. And I think it's really important to simply look at all the factors of a deal together, right, and not pass too quickly. That's also really important. So meaning On the one hand, you want to do this quickly. Right. Um, as, as you pointed out, uh, Whitney in, in, in, uh, you know, beginning of the conversation, um, on the other hand, you can't do it too quickly based on a variable. Thinking that it means something else. So I'll give you an example of both. Um, first I'll just comment that as you're starting as a new LP investor, you should tend towards. spending more time on everything and giving the GP the benefit of the doubt on everything. Until, of course, you have to ask and see what they say and sort of have a healthy dose of skepticism, which is what I always call it, which is good for investors. But I think it's really important because investments are tricky, right? So I'll give you an example. One thing I hear all the time is, Hey, you know, isn't it crazy that I got a deal from a GP and there's a 50 50 split. Um, I couldn't believe that, like, what were they thinking? I passed immediately. And I speak to the LP and I say, well, like, so in other words, you, you didn't tell me enough information to know if that's good or bad. For example, you know, let's say a standard breath. split is like 78% PREF, 70 to 80, and then, you know, the remainder in terms of the, in terms of the split. So, but let's say that the 50-50 split, I'm just making this up, but if someone says 50-50 split, I pass, but then you realize that the PREF was 10%. It's like, oh, well, I probably should have looked at that. Or perhaps it's a 50-50 split, but the GP is contributing 50% of the co-invest, and typically it's way less. So all of this is part of what I would call sort of like a slow and steady investment process. And I think it's very easy to find reasons to pass on a deal, but it's just not the way of the investor. And yeah, I think going back to your example, to circle back.

Whitney Sewell: It's a holistic approach, right? I mean, you're looking at many other aspects as opposed to just having a hard and fast thing that, Oh, nope, the prep wasn't this, or the split wasn't this, or the fee was this. Well, there may be something else that's really good about this or compensates that completely. Right.

Aleksey Chernobelskiy: I'll just add again, the way that I started this was. Over time, you get much better at this and quicker, right? So the reason why I wrote this list is as you get quicker and you sort of realize, oh, maybe it's a 50-50, but let me look at the prep. Let me look at the co-invest. Let me look at a few other things. And within a minute, you might be able to be like, well, okay, I know that it's not a 10% prep. I know they're only contributing 2% of the co-invest, et cetera, et cetera. And then you pass within, I mean, it could be a minute. Right. But it takes time to develop that skill set and reps of being able to see the deal sort of like from a, from a holistic perspective, I should say.

Whitney Sewell: Yeah, you know, and I think that that goes right along, along with obviously this, you know, the top 15 reasons to stop and think, you know, like the article that you wrote, because the very first thing is a syndicated real estate deal, lower than 65% split to LPs. Well, that's one thing, right? You know, the next one, social proof, the next one, talking about typical IRRs. Well, again, if you're looking at one of these things, right, well, we need to ask some questions, right? But that may lead up to your second or first topic or point, right? To ask questions about some other things.

Aleksey Chernobelskiy: Right. And quickly, I'll just add, there's a reason why I call it Stop and Think. I wrote a little bit about that in an article, but for the benefit of the folks listening, it's precisely for that reason. In other words, if something, if your split is 50-50, so it doesn't meet my first criteria, But there might be a reason for that. So it's a reason to stop and think, as opposed to just freaking out and saying, oh, red flag, I pass. Like, that's just not how investments work.

Whitney Sewell: Let's hit a few of these points, and we'll have to do it kind of quickly, but unfortunately, I know we could talk a lot about each of these in detail, but maybe you highlight a few of these, and then I would love to talk about, you mentioned it actually, currently advising on capital calls. I know there's many listeners or LPs that listen who would have a number of questions about that, and so maybe we talk about that too in another segment, and we'll dive a little more into those, but let's, Let's talk about a few of these, at least at a high level. And so the listeners have a better understanding from your article, but maybe hit splits for just a moment, you know, like, you know, the typical, obviously 70, 80%, but you know, when, when would you be okay with that being different? And, or what are some things the listener needs to be aware of?

Aleksey Chernobelskiy: I think the first thing is just understanding why it's important. Right. So. When you invest as an LP, you're a silent partner, and you're essentially giving your trust to the GP to do the best job possible on a given deal. The reason why this matters is because any profits, assuming things go well, any profits are split, and therefore, the lower the split to you, the lower the overall returns. And at some point, the returns get so low, so to speak, in probability that you might as well sort of invest in an index fund or put it into treasuries or whatever, meaning you need to be compensated as an LP for the fact that you are putting your money in a fairly illiquid asset. um, you are a silent investor. In other words, the GP has more or less full control over what happens. Um, and so because of that, there has to be sort of what's called a risk premium, right? Like you, you need to, um, expect more of a return in order to compensate for that. Um, so that's the basis of why it matters now. Um, I think. The most important thing to discuss here, I think is, is the relationship between the prep and the split. It's pretty simple, but many times people miss it. You know, I think. 78% is pretty market in terms of the prep for the benefit of the listeners. I'll just remind everyone because conversations I have almost every week, um, a prep is not a guaranteed return. It can be stopped at any point. In some cases, it doesn't even get paid when it's accruing. So don't just assume that this is something that will get paid. And as an example, I always give the example of a development deal will accrue a PREF, but it will not be paid current because there's no cash to pay it, right? Until they can actually pay it. So keep in mind that the PREF is, it's exactly what it says. It's a preferred return. but not a guaranteed one and not necessarily paid in cash up front.

Whitney Sewell: I try to make clear with every investor that it's the first portion of any cash flow.

Aleksey Chernobelskiy: Exactly. Yeah. Yeah. And then, you know, in terms of the split, I think they're related. In other words, that's another thing that I think companies need to understand is Um, generally speaking, and this is sort of in a vacuum, ignoring everything else in a deal, it's just a little hard to do, but. Um, as, as the press, uh, goes lower. In other words, your preferred return to the LP is lowered. You would expect the promotes to you as the LP being higher. Right. And that's an important relationship again, and going back to our example, if you see a deal that is, let's say a 10% prep. You're like, oh, okay, that's above market. Then you look at the split and it says 50 50. So then you're like, okay, that's, that's below market. But now, now, now it makes sense why it's below market because the prep is above market. Right? So, so these deal, these, these two variables sort of coexist. Right. And, and I would also say that it's important, I think, to know, especially over like a, uh, a short duration deal. Right. And by that I'll, I'll say less than five years. All right. Right. Um, it's incredible how much people overweight breath, um, where, where like the additional 1% kind of doesn't matter. So, so don't, in other words, don't be the person that says, Oh, I'm getting, instead of an 8% PREF, I'm getting a 9% PREF. And because of that, I'm willing to give up 50% of the promote. The promote in the majority of deals, especially anything value-add related, is where all the value is held. And so your extra 1% is actually not that significant.

Whitney Sewell: Yeah, no, I think it's, it's, yeah, we can't look at any of these things in a vacuum. Right. It goes back to your very first point. Uh, but you know, even with those things in mind, you're talking about split, you talked about the prep, um, you know, I'd love for you to dive into, you know, even your third topic there on your paper, which I would also encourage listeners to, uh, to look up, we'll definitely have a link in the show notes as well, but IRR. Right. And, you know, I hear some, some passive investors or LPs say, you know what, I don't look at IRR and some of them are like solely focused on it or, or, you know, I've heard a lot of different trains of thought behind, you know, what they feel like IRR should be or whether they should, you know, they focus on a completely different metric. Um, but I would love your thoughts behind, you know, that typical range there, but then also, you know, how much focus you put on it.

Aleksey Chernobelskiy: Yeah. Um, I mean, I think anyone that has looked at a model, and I always recommend LPs to look at a model, they can, with almost high certainty, understand why I don't recommend sort of like basing investment decisions in IRRs. IRRs are typically very weighted towards two or three assumptions in the model. One of the most, sensitive ones tends to be the exit cap rate. In other words, the exit valuation of the property when you sell. And that both depends on sort of market cap rates at the time, but also the NOI that you're able to achieve, which itself sort of depends on your own assumptions, right? And so because of that, actually, I very much, I really try to tell keys not to focus on IRR. Um, because I think what happens is you sort of self-select, um, the, the GPS, you're almost like you're, you're biasing your own funnel into GPS that across a large enough sample size are, are, uh, somewhat aggressive in their assumptions. Real estate, generally speaking, is not an asset class that returns 20, 30, 40% IRRs. And so when you're seeing really high IRRs, two things could be true. Either they're conservative assumptions or they're aggressive assumptions. With high IRRs, it tends to be the case that more of them are aggressive assumptions. So if, if you sort of like have this funnel that says, if something is in a 20% AR, it's not worth it for me to look at it. Um, then what happens is the bucket of things that you actually look at tends to be riskier on average. Um, whereas the, the GPs that really think about numbers and are careful to, for example, assume cap rate compression and other things that, that might ump IRR significantly. So they sort of get, um, lost in the tracks because like, you know, their 15% IR isn't high enough, so to speak. Um, but, but the reality is, is it's only 15 because they're showing you a conservative case or certainly hope it gets higher. They hit higher than that, but they, they're just not comfortable showing that as the base case on slide two or whatever it is. So, so I, um, hopefully that helps. I just, I think it's, yeah, it's really important to look at it in a vacuum.

Whitney Sewell: Yeah, something that you mentioned there that that stood out to me is, is you must look at what's going to accomplish that IRR for this project, right? You know, it's like, what, you know, what's the operator counting on to gain that high of an IRR and that one thing alone may never even happen, right? You know, or what's the risk of that one thing not have, whether it's a refi, right, or, you know, big cash payout, right, you know, or they have to sell in year two to accomplish this, this IRR. And that may not, you know, if they bought it last year, well, you're probably not getting that IRR that they projected, right?

Aleksey Chernobelskiy: That's right. And it's, um, I always tell people you, if you can't find the top three downside catalysts in a deal, you shouldn't invest. In other words, in any deal you're looking at, nothing is risk-free, real estate is not risk-free, it's not necessarily safe. It can be if it's acquired right, right? But it's really important to understand that even the right investment can have challenges. And if you as an LP can't identify, let's say the top three challenges that sort of have like the highest impact on your IRR and get comfortable with those challenges, so that you go into the investment knowing what could go wrong, then I just say don't invest.

Whitney Sewell: Yeah, no doubt about it. I yeah, I love that. Just thinking through a number of things that man, what what tells us that we shouldn't invest? And you know, anyway, I want to be able to get to a couple other things here before we have to move to the next segment. But, you know, you laid out the area, anything higher than a 3% acquisition fee should be, you know, something to think about, right? I like that. But then just fees in general, right? No clear outline of fees. I could not agree with you more. I want to be extremely transparent about where the funds are going, right? When we do a deal, I want every LP to know exactly what we're charging or what fees the deal is going to have. And obviously an acquisition fee is one of those. And you said one to 2% is common. Maybe elaborate there, you know, on when you see a 3%, you know, when you're, when you're okay with that, you know, when, when is that okay? Or when you've seen higher than that, even.

Aleksey Chernobelskiy: Yeah. Yeah. So, um, actually in the, in the same top of teen syndication mistakes article, I sort of outlined the fact that, um, at some point, a GP has so much experience and success that they could sort of stray away from the pack and charge more just because I mean at the end of the day fundraising is a supply and demand story and if you can charge more and I don't even want to say get away with it like there's nothing I mean if you're delivering amazing returns for your investors you deserve to get paid more than the guy next to you who doesn't who doesn't have that track record and abilities. And the example I pointed out is Renaissance, which is not in the real estate world, but I think they're sort of a guiding light, so to speak, in this world of extremely high fees, but an impeccable almost track record. In terms of fees as a general point, first, I'll just remind the listeners, especially in LPs, The reason why fees matter, and I actually have an article on this, it's called why acquisition fees in a syndication matter. The reason why they matter is because as soon as you place your money, you're immediately down on your investment. So for example, if, and this is a big misconception that I just don't address right away. Many times people say, oh, what's the big deal? It's just 6%. Well, 6%, in other words, what's the big deal of being 6% down on your investment day one? The reality, however, is if you do the math and you realize that the 6% isn't of equity, it's a purchase price. And that purchase price is levered, right? So for example, if you're investing in a deal, and I have a whole table in that article, if anyone wants to see it, but if you're investing in a deal at 6%, acquisition fee and they're 75% leverage. So that means day one, and I'm ignoring all other fees, closing costs. Sometimes there's like personal guarantee fees, all types of other things. If you're 75% levered, your money is down 24% day one. So you literally lost 24% of your money. And of course, I hope He thought about that and he sort of recovered because the investment is so good. But the impact of my point is the impact of fees is like very real when you look at it. And I think you should be aware of sort of. where your money stands day one as you, as you go into the transaction. Um, and in terms of, you know, market rates, as I said, I think one to 2% is, is common. A 3% can be seen sort of like on, on much smaller transactions as a percentage of purchase price. The percentage sort of tends to go up a little bit. Um, above 3% is like pretty rare. Um, it happens. Um, and I, and I think generally speaking, um, Well, one of, one of two things is true. I'll just be candid that either the GP is just like a phenomenal GP that can get away with it, so to speak. Um, and, and, and deserves that. Um, or, uh, to be candid, this is more often the case. Um, the GP is dealing with sort of like a retail base of investors. I just don't know any better. Like they just see it and they're like, Oh, real estate pool opportunity for me. Amazing. And they just don't even understand what the fee means. They just see the IRR, you know, passive income story, retired from your nine to five or whatever, you know, the best slogan is, and they just put their money, you know, without understanding it.

Whitney Sewell: Yeah, I've seen it both ways as well. And even as a passive investor myself and have questioned maybe a higher acquisition fee, but I figure out, hey, they've done this. You know, they they've had 30 successful deals or, you know, I mean, like there's a track record that that supports that or builds my confidence in a way that I'm willing to pay it. Right. Right. But I would say that's not always the case.

Aleksey Chernobelskiy: It's not always the case. And I think I would say just my experience, when you go above 3%, I would say it's more often the case that there are issues with the GP or the deal or both. It certainly happens that there are exceptions to the rule. And while we're on fees, by the way, I just want to mention, fees are there for a reason. In other words, I think many EOPs don't understand this. You know, the GP typically puts in months, sometimes, sometimes a year plus of work, uh, deal after deal to get into something that they're presenting to you. Um, hopefully this is not always the case, but hopefully they thought long and hard about this deal and pass on many others in order to get to this one. And so there's sort of like the sweat equity built in. Uh, but in the meantime, they have an analyst and an associate or the VP and the CEO and the principal, whatever, like people need to be paid. And so. Sometimes you lost money during diligence on a prior property, which you decided to walk away from to be, you know, an ethical GP. Um, right. So, so like there's a, there's a reason for fees. The reality is the GP runs on fees as a company. Um, and so they're super important. It is just the answer is both. In other words, a GP needs fees, but the LP also needs to understand how the fees that are being charged, uh, a, what are they? because sometimes they're not clear. And B, how did they impact your investment?

Whitney Sewell: you're advising a number of LPs, right? But a lot around capital calls right now. And I know there's many listeners who have questions about that. They've received that call that they were hoping not to ever receive, right? Or they may not have even known it was a thing, right? You know, I mean, really, they may not have even thought that was ever an option. And all of a sudden, they're getting a call from the operator they partnered with, you know, that's that's needing some capital, right? And they don't know how to assess that, right? Should I do this? Should I not? What does this mean? And I'd love to give you a minute to even walk through some of those things or some of the questions I know you're having LPs ask you and how to assess. Should I put more money in or should I not? And let's talk through that a little bit.

Aleksey Chernobelskiy: Yeah, sure. Um, so I, I guess first I'll just define, uh, capital calls because I think there's some confusion. Um, there's something that I would call an expected capital call and an unexpected capital call. Um, an expected one is typically as a result of like investing in a fund, for example, or maybe a construction project where at the outset you and the GP had an agreement. That, you know, they'll, they'll pull on, I don't know, a quarter of your principal, uh, every quarter for a year. or whatever it may be, or as necessary. So if a GB reaches out to you in that case, other than sort of understanding what's happening, et cetera, et cetera, and the economic landscape and the viability of the deal, which I always recommend, those are of particular concern, and those are not generally what's being discussed in the marketplace today. What I spend a lot more time talking about, both publicly on iMySubStack and and also just receiving calls from clients is the unexpected ones. In other words, you bought into a transaction. You and the GP, hopefully, both had the intent that the deal was fully capitalized. They won. In other words, no more capital would be needed. To your point, many LPs did not even understand that getting more capital was a thing. Right. Because it was just so obvious that, you know, we bought the property, like, well, why would you need more capital? So so now fast forwarding to today, obviously, the past two years have been pretty challenging for the real estate markets. And and as a result, a lot of LPs are getting capital calls. I think. What I would recommend from a decision perspective. is first just, I would always say, just take a step back and realize that what's in front of you is an investment opportunity. Like this is not an emotional thing. This is an investment and you can either decide to invest or not. And that sounds silly in a sense, but I can't tell you how many times I get calls from LPs almost freaking out because if they don't invest, they're going to get diluted. Um, if they don't invest, maybe the thing is going to end up in foreclosure. You sort of have a lot of different communication styles from GPS ranging from. Very transparent and honest, um, and well communicated, right? Uh, early all the way to like, complete surprise. Um, like, you know. we're going to lose a property in a few days if you don't send the money now. We don't even have a plan. I've seen everything. And some of it is healthy. A lot of it, I would say, is pretty not healthy and not enough information to make capital calls with. So just, again, know that it's an investment decision. Know that just like Um, at the outset, when you were able to ask questions to the. So, similarly here, like, there's nothing stopping you from doing diligence and asking questions to the right. That's the 1st thing I would say as a broad strokes. And if you sort of want to go through the typical steps that it goes through, I can, I'm happy to do that too.

Whitney Sewell: Yeah, nothing stops you from asking questions. I think it's, it's great to just pause and take a breath, right? Like you said, take a step back. I appreciated that stance. And even I've not heard anybody say it like that, you know, realize that what you have in front of you is an opportunity or investment opportunity, right? You can invest or not. All right, and try to assess Is this still a worthy investment to move forward with or not? I would love for you to elaborate a little bit or us dive into some of those questions because there may be a time you do want to continue.

Aleksey Chernobelskiy: Yeah, yeah, exactly. So, so typically the, the steps that I go through are, they're pretty simple. Um, and, and you'd be surprised that like how quickly things weed out for many people. Um, the first one might surprise you. It's like, do you actually have the money liquid? Um, I've, I've heard people like they wanted to pull on their 401k, uh, which would be sort of like, uh, That would be needed to pay back with interest if they did that. I've heard people wanting to sort of like, borrow from an uncle or mom or whatever. And all of that is, I'm not saying that's good or bad. It just further complicates the equation. In other words, if you have the money sitting in your bank account, and you don't need it per se for any emergency, that is sort of like step one. And many people don't even pass that stage. So I think it's kind of a silly place to start, but it's also like a really important place to start. The next thing is, I would say, you'll have to understand legally what happens if you don't invest. In other words, what is the cost to you, so to speak, for not investing? And this differs across GPs. I think some GPs are what I would call, I guess you can say more favorable to LPs, and they say, look, we kind of messed up here. We're not going to dilute you if you don't invest. But if you do invest, like, here's kind of like the upside that you can participate in. So that way, you know that if you don't invest, the worst case scenario is you just get diluted by the new investors, but not penalized for not investing. And those two things are very different. You're obviously going to get diluted by new equity, because if you don't contribute, your shares will naturally get diluted. But that is very different than getting diluted because you didn't contribute to that new investment. Those are two separate things. And it's important to just simply understand, legally speaking, what will happen if you don't invest. And again, you'd be surprised how many sort of like capital call emails I've seen. Honestly, it's probably more than 50%. Where the GP emails the LP, of course, it's, you know, sort of like a mail merge across all the LPs. Many times this is like big funds that I think should know better, but they just don't state what happens in either direction, whether it's good, so to speak, and you don't get diluted if you don't invest, or bad, and you really get penalized. And oftentimes, the legal agreements are actually not super clear on these matters. So it's really important to get clarity there. I guess let me stop there before I continue. I have a few others, but any questions?

Whitney Sewell: Yeah, no, I love your stance on it too. I mean, like I said, you know, taking a step back, but then thinking through these things, you know, and it's interesting, you know, you talk about something as simple as, well, do you have the money to invest? And you also mentioned, I like this, and if you do have it liquid, Are you sure you don't need it yourself? Right. You know, is it is it ready to just deploy somewhere? Because if not, then it's kind of a pointless conversation. Right. Yeah.

Aleksey Chernobelskiy: Yeah. Yeah, exactly. And at that point, like it I mean, it's perhaps painful to realize that. But it's like if you if you need the cash for something else or you don't have it, like, I mean, there's just no decision to make. and you sort of like take yourself out of that decision. Yeah, okay, so once you realize, or I should say understand what the implications are to not investing, the next step I would say is just understanding where your existing position sits. Like to put it simply, let's say you invested 500 grand. Do you still have 500 grand? Do you have 700 grand in there or a million? Because like the property is worth a lot more, or perhaps do you have nothing? And, and this is a whole article that I wrote at length about which deal the article, I think it's called the sunk costs matter in capital calls, because there's sort of like this I think dishonest connection between the last investment and the new investment, the capital called sort of marginal capital, in that you almost want to just forget the last stuff and say, oh, that's a sunk cost. I'm just going to ignore it. I'm just going to focus on whether I want to invest today or not. But the reality is, I think as far as capital goals go, it is true that it's at some cost. You can't get the money back. But these things are actually extremely connected. And knowing where your original position stands and sort of like how you can get that money out and the business plan for that should have very direct consequences on your plans on returns for the capital call money, which you could invest in a new syndication if you wanted to, right? Like that 100 grand, let's say, I'm just to give an example, like you invested 500 grand, and let's say Sadly speaking, by the way, Whitney, I mean, this is probably more the more often the case and it's not. Um, people call me not being sure what a capital call is. In the middle of that conversation, as I, as I do, as I help them with diligence, it becomes apparent that the 500 grand that they invested is gone. Like, it's not officially gone. Right because the property hasn't sort of marked market and sold. But in terms of the equity worth, based on a realistic outcome or outcomes, you can even do a sensitivity analysis, whatever. It's essentially gone. So at that point, you have to think that, you know, they want another 100 grand relative to my original 500 grand. That 100 grand I can put into treasuries today and make 4% or 5% or whatever. I can sort of invest it in the stock market. I can invest it into alternatives such as syndications. And that is a totally new bet, new GP potentially. And perhaps that's a good investment. What is going to convince me? And this is important, like you should be convinced just like you were convinced. With the original deal, you should be convinced that doing the capital call is a good idea. And so what is going to convince me that the 100K is going to earn more by reinvesting it back into this property compared to investing it elsewhere, right? And the original status of that position is pretty important. in that analysis, because I don't know if I want to get into the weeds. This might take a long time. But for anyone that wants to sort of see this live in a model, again, I would recommend the article that I wrote specifically on this, which is, do sunk costs matter in capital calls? There's like a literal model that I go through to explain how these things are related. And look. The last thing I would say is just, um, how do you know, and this is like, probably missed at least 50% of the time. Like, are you sure that this is the last capital call? I mean, in other words, I can't I can't tell you how many times. GPs will freak out and look, I want to be sensitive. It's scary to be a GP in difficult times. That's probably another episode in its own right, because I've seen it from the inside. Sometimes a GP will react to a piece of news like, we can't pay debt service next month. Oh no, okay, we need to issue a capital call. Okay, um, but then from an LP perspective, like. All of that is understandable, but from your perspective, you need to know. Like, is there a plan to ensure. That we're not going to need another 1 right and that another 1 might be because in 6 months. The rate cap expires. um or in six in six months we're going to have some other issues or if there is a refinance and instead of a cash out refinance it's going to be a cash in refinance which is another topic that i think lp investors are sort of like um learning slowly so so yeah let me i know i kind of said a lot but like those are generally the steps that i go through

Whitney Sewell: I love the questions that you're asking. And I think every LP needs to needs to know these questions, especially in what you know, in our economy right now, as many of these are happening, unfortunately, across the industry. And but it's interesting, you talked about, you know, as your investment going up or down, right? What is the what is your position currently? And, and I think it's a I would think that most assume that it is gone, right? More times than not, or when would you see the position, you know, favorably, right? They invested the 500k, but, you know, there's a capital call and their current position is 800, you know, or 700.

Aleksey Chernobelskiy: Yeah, I think there are actually quite a bit of examples like that. I do think it's the minority. Um, but I'll just give you an example. A developer is developing a brand new apartment building. Um, you know, they're 2 years in and they're like, just a little bit over on costs. So they're like, 90% done. Almost done, um, but it's a phenomenal area. The apartment, so to speak, from a valuation perspective is well in the money. Um, and they just need sort of like the 10%. maybe half of it will come from construction loans, right, from the existing, but like the lender didn't want to put up the entire percentage because of over, you know, going over budget. And so there's like a tiny capital call to get them to the end. But like, as far as the business plan goes and the overall valuation, things are more or less, I mean, they've probably got impacted in the past two years. So it might not be, you know, the 2.5x multiple you expected. It might be a 1.5, but you're probably in the money still. Whereas what's happening a lot of times now is, to your point, I think probably the majority of the calls I get, and there might be some bias there in terms of people calling me for certain reasons, But certainly the majority of people that call do have their wife, either wiped out equity or it's like at least, you know, let's say 50% impaired.

Whitney Sewell: Yeah, yeah, no, that's interesting. I just wondered, or if you see any, it's a great example, though, a development type projects, obviously, there's no cash flow, right? You know, and they may still they may have had more expenses than they expected, or something like that. But I wondered if you see that at all in a typical value add deal or some kind of, you know, already construct, you know, something that's not a construction type project. Yep, exactly. And, uh, let's see, you said, uh, yeah. And is this the last capital call? A great point as well, uh, in thinking through, uh, you know, anything there that would, uh, help you to determine that, uh, you know, cause I think that that could be hard to determine for most LPs, right. They're not going to be as sophisticated as you at, at underwriting to think through, well, you know, how would I know, you know, if this is going to be the last capital call or not.

Aleksey Chernobelskiy: I mean, the first thing I would say is just ask the GP. And as always, don't ask them in a yes or no way. That's a whole kind of topic that I. I wrote another article called 26 questions to ask your GP. The introduction to the article, it sounds funny, but it's like, how do you ask questions? And the way to not ask questions is yes, something that can have like a very minimal information as far as the answer. So the way not to ask the question is, do you think this is, the only capital call we'll need? Or even worse, do you think this capital call will be enough? Like enough for what, right? And in other words, perhaps a better way of asking the same question would be, hey, you know, I appreciate all the information, blah, blah, blah. Um, I noticed in the deck, I'm just making this up, but like, I noticed in the deck. That the, the uses, uh, in other words, what the capital will be used for. Um, is for cashflow constraints today. In other words, like, operationally. The property is sort of underwater, um, because let's say, you know, they're in the middle of rehabbing the units and they're not cash flowing enough. Um, but I also noticed in in, you know, on another slide. You mentioned that we have a capital call coming due. I'm sorry, um, a recap coming due, um, at the end of next year. So, what is your plan? On the capital call, or, or we have a maturity coming due a debt maturity. So, like, what is your plan on the refinance? Unfortunately, these questions aren't so simple. You know, Whitney, I think it does require a certain, I mean, one is just experience, but two is just being thoughtful and Yeah, I guess, you know, just being like really thoughtful and thorough. And I think I'm hoping you were thorough at the outset. Right. And my bigger point is you should be just as thorough or maybe more thorough, I would argue, at the point of a capital call, because at that point. I'm like, I'm not here to point fingers. Like there's a market change that happened. Right. But at the end of the day, like something not good happened. And the same person that was a steward of that capital is now asking you for money. So sort of like the level of knowledge that got you to invest the first time should be not enough to get you to invest again. Yeah. Right. you now have new information that I think should require you to sort of like inquire more and understand more.

Whitney Sewell: Like you need to, you need to re-underwrite the deal, the opportunity again, all over.

Aleksey Chernobelskiy: Yeah. Yeah. And look, I think that's sort of somewhat unrealistic for like an average LP, but, but I would say at least again, at least understand the catalysts, right. And, and understand what could go wrong.

Whitney Sewell: Thank you for being with us again today. I hope that you have learned a lot from the show. Don't forget to like and subscribe. I hope you're telling your friends about the Real Estate Syndication Show and how they can also build wealth in real estate. You can also go to lifebridgecapital.com and start investing today.