10HardQuestions toAsk Before Investing in a Commercial PartnershipDeal IDENTIFY STRATEGIC RISKS & REWARDS BEFORE YOU INVEST.
by Salvatore Buscemi
eal estate has always been regarded as an equal-opportunity wealth creator. However, caveat emptor: Real estate historically has been full of scams. Based on my experience managing dis- tressed real estate funds, that fear of being deceived and losing it all is the number one reason why smaller investors don’t invest in commercial partnerships. These 10 essential questions will teach you how to clearly identify the strategic risks and rewards associated with any partnership deal. QUESTION #1 HOW MUCH IS THE OPERATOR (THE PERSON MANAGING THE DEAL) INVESTING PERSONALLY? When somebody comes to you pro- moting an investment opportunity, you should ask them directly: How much is their stake in the deal? They should have a meaningful, personal stake in the deal. Although this is not a rule of law, espe- cially if this is your operator’s first deal they should put some meaningful skin in the game because the risks are quite high that they will make mistakes. Why it matters: If the operators don’t R
have a stake in the deal and things go wrong, they are likely to walk away from it.
commercial real estate deal: One is a refi- nance, and the other one is a sale. Why it matters: You should partner only with an investment group that is either capable of successfully closing a sale or qualified to get the property refinanced to get its investors taken out. QUESTION #4 HOW MANY SMALLER INVESTORS DO THEY HAVE? When managers or operators say, "Well, we were taking $50,000 as a min- imum, but I'll let you in for $10,000," that usually means that they are desper- ate. They may be raising a lot of money
QUESTION #2 IS THERE A HUGE UPFRONT FEE OR LOAD? Never take your eyes off the fees. Fees should be considered as imagined, meaning they are paid after the investment process has begun. If the fees come off your investment up front – for example, they take 10 percent off the top of a $1,000 investment – that is a bad deal for you. You will start out with a $900 investment instead of your original $1,000! Why it matters: Sophisticated, experi- enced operators know that fees structured as “a load” or taken up front are not good for investors or investments. QUESTION #3 WHAT IS THE EXIT STRATEGY? When you ask this question, you are asking, “How will I get out of this invest- ment?” It is not an unreasonable question. Do not invest in any real estate funds that present no clear-cut exit strategies for their investors. There are only two ways investors can get taken out of any
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Salvatore Buscemi is the co-founder of Dandrew Partners, LLC, a boutique real estate investment bank, founder and CEO of The Commercial Investor, and
co-founder of the Association of Capital Placement Agents for Real Estate (ACPARE), the industry’s leading accreditation agency for buy-side real estate professions. Learn more about raising money credibly and correctly without looking foolish the first time by downloading your own done-for-you private investor pitchbook by going to www.TheCommercialPitchbook.com.
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