1. Are you an operator or syndicator?
One of the first things you want to know is the role the company you are investing with plays. They are either the operator or a syndicator.
The operator is the group who acquires and sells the investment, as well as implements the business plan. They may also raise a portion or all the capital required to close on the investment.
The syndicator might not actually operate the investment (although, operator and syndicator are oftentimes interchangeable). The syndicator may be a co-GP or owner of a fund who raises capital to invest with other operators.
Whether you are investing directly with an operator or indirectly through a syndicator, you want to know whether their compensation is aligned with the success of the project. That is, is the operator’s or syndicator’s compensation tied to the investment’s cash flow and value? Or it is based on something else, like an asset management fee, percentage of equity raised, etc.? Or it is a combination of both?
Since your return as a passive investor is based on the cash flow and/or value, you want the operator’s or syndicator’s compensation to be based on those same two metrics as well.
2. Tell me about a deal gone bad?
This is Ryan’s favorite question. Most of the material you receive about an operator and their investments will be 100% positive. No operator is going to include a section in their company or deal material about a time they lost money on a deal or when a deal went sideways. However, Ryan believes you can learn a lot about an operator from hearing about how they managed a difficult situation. It helps you judge their grit.
Additionally, if an operator says, “We have never had a deal go bad,” it indicates low experience or that they are lying.
3. What are your mission, vision, and values?
Having a well-defined mission, vision, and set of values is what Spartan attributed to being named one of the fastest-growing companies by Inc. magazine. The operator’s mission, vision, and values will tell you who they are and why they do what they do. The first thing you want to determine is whether they’ve defined their company’s mission, vision, and values because this indicates a higher level of credibility and professionalism. Then, you want to determine if their mission, vision, and values align with yours.
You will also want to make sure they don’t have a “say-do” gap – that they actually act on their mission, vision, and values. So, ask for a recent example of how they’ve recently used their mission, vision, and/or values to make a business decision.
4. Who is on the team?
The structure of their team will impact the success of their investments. The best operators aren’t a “one-person show” where one or a few individuals are wearing all the hats. They should have a deep bench of executives, directors, managers, analysts, assistants, and associates.
It is also beneficial if they are vertically integrated. The more work performed within the company and the less worked outsourced to third-party vendors, the better. That means in-house property management, compliance, construction, investor relations, marketing, underwriting, accounting, etc.
Another good thing to know is how much of the profits generated by the operator and their company is reinvested into hiring new team members and providing growth opportunities for their current team members versus how much is going into their own pockets.
5. What is your core business model?
This question may seem odd. Of course, their core business model is buying and managing office buildings, developing and managing self-storage facilities, adding value to apartment communities, etc.
However, this is not always the case. Sometimes, they may be buying office buildings, for example, while working a full-time, W2 job. Or they are focused on one aspect of the overall business model, like finding deals or raising capital. Or the majority of their income is derived from selling education or coaching. The point is, just because someone is involved in commercial real estate doesn’t mean it is their core business model.
Ideally, you are investing with a group who are full-time operators. They have a fully integrated company that buys, manages, and sells commercial real estate. It is okay if they are involved in other industries, like education, coaching, passive investing, etc., but it should be secondary to their core business model.
5 Questions to Ask a Commercial Real Estate Company Before Investing
When you are passively investing in commercial real estate, you are placing a lot of trust in the active operator. To ensure your capital is in good hands, here are the top five questions to ask before investing.
Are they responsible for acquiring and selling the investment and implementing the business plan, or do they play a smaller role? Also, is their compensation based on the performance of the deal?
Ask about a time a deal went bad to gauge the experience level, truthfulness, and grit of the operator.
What are their mission, vision, and values, and do they align with yours?
Are they a vertically integrated company that invests in attracting new team members and in the professional development of current team members?
Is their core business model operating commercial real estate?
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.