First LP deal is mixed-use. How do I read the retail half?

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, it's a signal of interest with negotiated headline terms and no obligation to sign. I've watched tenants walk from LOIs at the lease review stage more than once when their attorney read 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 you sign at $2 per square foot less than the LOI rent and it takes six more months. Any sponsor who's 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's the list I'd send, and the reason for each item, because you should be able to explain to yourself why you're 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 aren't public the way home sales sometimes are, and roughly a dozen states don't 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's his own leases from a prior deal in the same town, that's the strongest answer you'll 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 aren't a visible line in the sources and uses, either they're buried or they're 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's accruing or paid.

The full track record on all four prior deals, including the two that weren't 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'd want your own attorney or advisor to read the documents. What I've listed is the underwriting, not the legal review.

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 I'd push it further. The apartments in that building are the reliable part. Eighteen units in a growing suburban downtown will rent, the question is only at what price and how fast. The 9,000 sf of ground floor is a leasing project with a timeline the sponsor doesn't fully control, because it depends on three separate businesses making a decision, getting financing, and passing a code review for their use.

Running a small business for five years taught me how those decisions actually get made. A tenant signing a ten year lease on a new build is committing more capital than most of them have. They'll 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's why the TI budget sextant mentioned matters so much. It's 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 don't 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's right and it's 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're going to get. The ones I've talked to while building my list either had the answer ready with the source named, or they got vague and pivoted to the track record. The vague ones were the ones I stopped 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's 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.