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Below are questions that I typically ask a Managing Member early on in my diligence process. I have found that the answers are typically very telling.
1) What about this investment is special?
With a tremendous amount of opportunities and real opportunity cost, I look for a compelling reason or investment thesis for each commercial real estate investment.
2) How did you find this opportunity?
I have a strong preference for off-market investment opportunities. I believe this is indicative of the Managing Member being in the know and results in real value creation.
3) What other assets do you own or have previously owned in this submarket?
I typically look for sponsors with real local expertise gained through ownership in the sub-market.
4) How much of your own equity are you investing?
I require Managing Members that I invest with to have significant skin in the game.
A few important terms and concepts necessary for understanding commercial real estate investing:
Member – Each investor in a Limited Liability Company (LLC) is referred to as a Member. The majority of commercial real estate investments are accomplished through a Limited Liability Company due to tax reasons and LLCs generally being simpler for enabling the economics typically associated with commercial real estate transactions.
Managing Member / Sponsor – This is the company or individual that identifies the opportunity and executes the transaction and plan. On CrowdMason, this party is identified as the Sponsor or Real Estate Professional.
Preferred Return - This is the return that all members receive before capital is returned. This typically compounds annually if not paid through cash-flow from the property.
Promote – This is the additional interest that the Managing Member / Sponsor receives as a reward for successfully executing the plan. That is, since the Managing Member / Sponsor may only have a relatively small portion invested in the transaction (10% to 30% of the equity required), having a promote allows them to receive a greater percentage gain if they are successful.
Waterfall – The flow of funds from the investment to the Members is typically referred to as the “waterfall”. A common waterfall is as follows: 1) first, to Members based on their percentage ownership to pay their Preferred Return, 2) then to Members based on their percentage ownership to return the capital that they contributed, 3) next the Managing Member receives a Promote, 4) finally, the remainder is distributed to Members based on their percentage ownership.
Two more reasons why commercial real estate is well suited for crowdfunding (this builds on the list I originally posted here).
5) Real estate sponsors understand how to work with partners and the resulting reporting requirements and restrictions on control.
6) Real estate investments offer numerous exit potentials (refinancing / sale) and are not all or nothing investments.
For all these reason, I expect significant crowdfunding success in the real estate space.
CrowdMason is the real estate crowdfunding platform for accredited investors. CrowdMason streamlines the process of identifying, reviewing, investing and monitoring commercial real estate investments thru private placements. Watch our video to learn more.