Real estate crowding allows investors access to private real estate that is of institutional quality on the basis of deal by deal which was otherwise unavailable before unless by direct and personal relationships. Therefore, real estate crowding has greatly proven to be a game changer .The real estate crowd funding investor checklist is checklist that aids investors to be aware and knowledgeable of risks present in syndication of real estate. This helps to comprehend the various components of the economic deal structure and asset intricacies that are of importance to them.
The real estate investor has to check for the following;
i. Time frame
This is the expected period that the investment will last. The investor should make sure that they are comfortable with the period of time for which their money will be locked up in the investment. This has to be checked due to the high illiquidity of real estate investment that are direct.
ii. Monetary issues
They should check to know how much money the sponsor is to contribute. Additionally, where that money comes from. The investor should know how much tax they are expected to pay hence ensure that the investment is viable
iii. Risk/Return profile
The returns from the investment should be greater than the risks involved.
iv. Economic deal structure
This comprises of various aspects such as;
- The appropriate return “pref”, the specific split after the pref, whether or not there are multiple hurdles
- The occurrence of the pref paid e.g if quarterly
- Whether the pref paid accrues, compounds or is current
- Whether incase some return hurdles fails there could be a clawback mechanism.
- Whether the quoted returns are at investor level or at project level
- Whether the distributable cash flow is return on capital or return of capital.
v. Exit plan
The investor should be clearly aware of the channels they might have to follow when exiting the investment, who the buyers will as well as the valuation of the shares.
vi. Sponsors
The sponsors should be credible, experienced and highly reputable in the asset class. They also ought to know how much fee will be payable to the sponsors. Moreover they should know how to give the sponsor incentives through ways such as leasing, asset management or sourcing.
vii. Worst case scenarios
The investor should be comfortable with the implications that they may fall into incase of scenarios such as loss of the full property investment.
viii. Terms and conditions
These are the various conditions of the deal such as the deal’s leverage, and the steps to be taken in case the sponsors decides to default on the deal.
The investor should also check the legal requirements involved. This checklist will serve a great deal to assist people investing in private real estate as they look into getting into any projects.
