The number three trait in a syndicator: conservative

Pretty much every syndicator selling a deal will say the same thing: "I am a conservative underwriter." That's the right thing to say. But is it true?

What do we mean by conservative underwriting? We mean nothing at all politically--the person could be the most liberal or libertarian or anything else when it comes to politics. It means that the person takes seriously the task of capital preservation. It means that they are ensuring, as a doctor does, that they first "do no harm." It means that their assumptions are carefully grounded in fact and on the less-ambitious side at every turn. It means that they have consistently, reliably done better on their deals than they said they would.

When you are on the phone with them about a specific deal, most syndicators will tell you in a solemn tone that they have "underwritten this deal conservatively." But we are here to tell you that we are in one deal described as "conservative" that is plainly underperforming and may even blow up--ideally not, but the syndicator absolutely did not underwrite "conservatively" despite vows that they made to us before we parted with our investment. We even went back in to listen to a podcast and here is the direct quote from the guy: “I am always conservative in my underwriting.” And same in my notes from my call with him. Uh, nope. The facts prove otherwise, unfortunately. Our error for trusting his repeated assurances.

So, now you know (1) you should ask anyway and (2) every syndicator will tell you they are indeed conservative in their underwriting and (3) it is not always the case. How can you possibly know if they are or aren't?

There is no substitute for a track record. The way to judge true "conservatism" in underwriting is that they have done so consistently and successfully in the past. What we do is ask to see past deals they have done, comparing what they promised to what they delivered. That has been easier to do during some periods (2018-2021 cycle, for instance) than in others, so beware the cherry-picking approach of sharing results with you.

References can help too. Ask the syndicator for a list of people you can call who have been LPs in previous deals. We have been that "reference" for the best of the syndicators we have worked with and have happily shared the direct results that the syndicators have achieved compared to what they promised. If they have no references who are not family members, then you know you should proceed with real caution!

And finally: you can learn to underwrite deals yourself so that you can in turn assess the underwriting that the syndicator has done on the deal before you invest. What kind of rent increases do they assume? Have they thought carefully about the debt they are using--and if it is not fixed, do they have a rate cap that extends for a long enough period? What do they presume in the numbers about exit cap rate? Are they counting on an early cash-out refinance (we are really, really wary of that in pro formas after bad experiences)? These are just a few of the questions you can ask and seek to answer using, well, math on your own as well as comparables from other deals. If you have done or seen comps from similar regions and similar types of buildings, you can get a sense for yourself of true conservatism vs. lip service.