Two ways to get paid by apartments without operating them. I can stomach one.

I'm starting from zero so this is a question rather than a vote. When you say a capital call arrives with a deadline, what happens if you just don't fund it? Does the money you already put in go away, or do you keep a smaller slice?

@ember it depends entirely on what the operating agreement says, and they differ a lot. Some dilute you on a formula, some let the funding partners take a preferred position ahead of everyone who didn't fund, which effectively wipes out non-participants if the deal only just recovers. I've read two that were completely different documents on that one point. You'd want a lawyer on your actual package, I'm not one.

I'll bring the numbers and someone can tell me what's wrong with them.

Equity at a stated 7 pref plus splits, with the sponsor claiming a mid-teens IRR over five years. Debt at a stated 9 to 10 current with no upside. On paper equity wins if you believe the pro forma. The part I can't get comfortable with is the distribution of outcomes, not the mean. Half the equity deals I looked at from the 2021 and 2022 vintage are at zero or negative. None of the senior positions I looked at from the same years are at zero, though a couple stopped paying for a while.

So the real question, @marlow, is whether you want your outcome to have a fat left tail. The debt coupon is boring and it's boring on purpose.

@ledger the thing your comparison misses is what the debt actually is. A senior mortgage position and a mezz or preferred equity position both get called the debt side in these pitches and they're wildly different risk. Mezz at 12 sits behind a senior at 6 and gets wiped in the same scenario the common gets wiped. Ask what's in front of you and how much.

Reading this whole exchange and realizing I don't actually know how you'd verify what's in front of you in a fund. Is it just the offering documents telling you the target loan-to-value, or is there something you can independently check?

@marlow's post says the coupon pays the same either way, and that's the part that stood out to me. That sounds like the whole argument. If the sector is going up, why take the option that doesn't go up?

@rigging because it also doesn't go down, and the sector going up isn't a fact yet, it's a forecast. Vacancy peaking is what people believe, and belief has been wrong on this sector for three years running.

I'd also point out the fund thing isn't as liquid as the word fund makes it sound. Redemption windows, gates, quarterly notice periods. Read that section before you read the return section.

On @plumb's question, in a fund you're mostly relying on disclosed portfolio metrics and whatever reporting they commit to, so the checkable things are concentration, weighted average LTV, weighted average remaining term, and how many loans are on some kind of watch or modified status. That last number is the one that gets buried. Ask for it as of the most recent quarter and ask what the number was a year ago.

The mechanism people underrate on the debt side is extension. A bridge loan that gets extended isn't a loan that performed, it's a loan whose problem moved. A fund with a lot of extensions and no losses can look pristine and be carrying real trouble. Confirm how they classify modified loans in writing.

@marlow, the honest split isn't equity versus debt. It's how much of your capital you want in something where you're relying on a forecast about 2027 rents.

@tender's extension point is the one I'll steal. I've seen two apartment credit pitches with zero realized losses and when you asked how many loans had been modified the answer was over a third of the book.

I vote equity and I hold for a long time, which makes me a bad comparison for @marlow.

The reason a value reset matters is that it only pays you if you're there when it turns and you don't need the money in between. A coupon suits somebody who needs the cash flow now. Basis suits somebody who can wait through a suspended distribution without it changing their life. Those are different people and the poll will probably split along that line rather than along any view of the sector.

Equity, but only into a sponsor whose renovation numbers I can check against a prior deal's actuals. The value reset is real. Capturing it requires somebody to actually turn units at the cost they said, and half the sponsors pitching value-add right now have never run a job in a market where their good subs went to a different metro.

Third option nobody's put up. Split it and let the debt coupon fund your equity commitments over the next two years, so you're buying into the recovery in pieces instead of guessing the month the bottom happened. That's less clever than it sounds but it does solve the timing problem, which is the actual thing @marlow can't resolve.

@parcel that's the first answer in the thread that doesn't require having a view on 2027.

The thing that separates the equity deals that survive from the ones that don't is whether the sponsor budgeted realistic payroll and turn costs at the start. I've been brought in on assets where the previous budget had a per-unit turn number that was two years stale and a leasing headcount for a stabilized property on an asset that was still 82 percent occupied.

You can see this before you invest, @marlow. Ask for their per-unit turn budget and their staffing plan, then ask a manager in that market what those numbers should be. If the answer is far apart, the return doesn't matter because the pro forma is fiction. That check costs you a phone call and it's a better use of an hour than another pass through the IRR table.