How a first time LP should read the retail half of a mixed-use offering

The two letters of intent are worth almost nothing and you should treat them that way in your own head. An LOI on retail space is generally non binding, a signal of interest with negotiated headline terms and no obligation to sign. Tenants walk from LOIs at the lease review stage with some regularity, often the moment their attorney reads the CAM clause. What you want to know is whether those LOIs have been converted, and if not, what the sponsor's plan B rent is. Ask him this exact question: what happens to the model if the space signs at $2 per square foot less than the LOI rent and it takes six more months. Any sponsor who has done two of these has run that case already and can pull it up. If he has to build it for you, that tells you something about how the deal was underwritten.

Here is the list to send, and the reason for each item, because you should be able to explain to yourself why you are asking. The rent roll for the existing 18 apartments as they are today, plus the renovated rent assumption and the comp set behind it. You said you can sanity check this on listing sites. Do that yourself and see if the sponsor's number is at the top of the range or the middle. Top of range for renovated units in a growing downtown can be right. It should still be a conversation. The retail comps with addresses and dates. Retail rents are not public the way home sales sometimes are, and roughly a dozen states do not make sale prices public at all, so the sponsor's source is either a broker, a data subscription, or his own leases. Ask which. If it is his own leases from a prior deal in the same town, that is the strongest answer you will get. The tenant improvement and leasing commission budget for the ground floor, as a separate line. On 9,000 sf of retail, TI and commissions can run into six figures and they hit before the rent starts. If those are not a visible line in the sources and uses, either they are buried or they are missing. A downside case with retail at 60% of projected rent and twelve extra months of lease-up. Look at what happens to your pref in that case, and whether it is accruing or paid. The full track record on all four prior deals, including the two that were not mixed-use, with original projections next to actual results. Two exits above projection is a fine sentence. Two exits above projection in a period when everything went up is a different fact. And the waterfall itself, read slowly. Whether the pref is cumulative, whether it compounds, and what the sponsor gets on a refinance rather than a sale. That last one catches people. Evaluating a private offering is a securities question at the edges and you would want your own attorney or advisor to read the documents. What is listed here is the underwriting. The legal review is a separate job.

Ask who's doing the retail leasing and whether they're local. A broker forty minutes away with no tenants in that town leases slowly.

One thing from the licensing side: the sponsor's projections and the broker's opinion of market rent are two different documents. Ask for both.

Here's the question worth asking every time: what's the sponsor putting in.

On a $4.2M raise, how much of that is his own money, and is it on the same terms as yours or is it a different class. Co-investment amount is the number I look at first now, because it tells you whether he loses anything real when the retail leases at half. If his money comes out first on a refinance and yours stays in, that's in the waterfall and you'd never spot it unless you looked for it.

Second thing, and sextant touched it. Ask what he gets paid regardless of performance. Acquisition fee, construction management fee, asset management fee, and a disposition fee at the end. Add them up as a percentage of the raise. It doesn't make the deal bad. It does tell you how much of the sponsor's return arrives whether or not the ground floor ever leases.

Genuinely asking, if a third of income is retail and the retail is unsigned, isn't this partly a development bet dressed as an income deal?

Plumb has it about right, and it is worth pushing further. The apartments in that building are the reliable part. Eighteen units in a growing suburban downtown will rent, and the only question is at what price and how fast. The 9,000 sf of ground floor is a leasing project with a timeline the sponsor does not fully control, because it depends on three separate businesses making a decision, getting financing, and passing a code review for their use. Small business tenants make those decisions on a slower clock than a model assumes. A tenant signing a ten year lease on a new build is committing more capital than most of them have. They will take the space and then discover the buildout costs 40% more than they planned, and either the landlord bridges the gap or the deal dies at the eleventh hour. That is why the TI budget sextant mentioned matters so much. It is the thing that closes the tenants. So ask the sponsor what kind of tenants the LOIs are. A regional coffee chain with twelve locations and a real estate department is a different risk from a first time restaurant owner with a great concept. Both can work. They do not lease on the same schedule.

I'm starting from zero too, and the part that stuck with me is that you'd be embarrassed to ask the sponsor. That's backwards, surely.

Ember is right, and it is worth saying plainly. A sponsor taking $50k checks from strangers should expect the retail comps question, and how he answers it is most of the information you are going to get. Sponsors tend to sort themselves here. Some have the answer ready with the source named, and others go vague and pivot back to the track record. The vague ones are the ones to stop calling. One addition to the list. Ask what the exit assumption is on the retail portion at year five. Mixed-use gets valued as a blend, and if the model assumes the whole building sells at an apartment-style cap rate when a third of the income comes from three retail tenants with short remaining lease terms, that is an optimistic exit. Buyers price retail income by lease term and tenant quality. A bay with two years left on a local tenant's lease trades differently from one with eight years left on a credit tenant, and that difference at exit is bigger than the difference in annual rent. Also find out whether the five year hold is a hard date or a target. Most of them are targets.