Whoa! Got my hands on someone else’s PPM…

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Just got my hands on the marketing materials for a deal being syndicated by one of my (larger, more established) competitors.

Was obviously thrilled to take a look at the forecast economics and how they are structuring deals.

The structure is fine. They’re actually not really being compensated sufficiently for the work they’re doing on the deal.

But it’s not because they’re super generous.

It’s because the economics of the deal are, to be blunt, awful.

After doing a bunch of work to the units, the equity can expect a ~2-3% annual yield.

To clear the 8% pref they are offering, the sponsors depend on an exit at a 5% cap after 3-4 years.

But that assumes we’re still in a 0% interest rate environment. If rates rise during that period, cap rates will, too, and it might be pretty hard to sell a 5% cap.

And that’s not all. The worst part of the whole pitch is that they’re factoring in a 2.5% cost of sale. On our deals, we assume 7-8% (5% to the brokers, 2-3% for escrow, title, transfer tax, etc.).

Once you factor in a realistic cost of sale, the deal is actually pretty sour for everyone.

Sometimes I fall into the trap of thinking that people who have done this longer than me and are therefore larger know something I don’t. In this case, it seems they don’t.

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