Single-asset QOF where you can see the building, or a pooled multi-asset fund?

Question

Reading two offerings side by side and they're barely the same product.

One is a single-asset QOF, 88 units, one tract, sponsor is local and has built four of these. I can drive the site, read the rent roll assumptions, and check the contractor's other jobs. Fee is 1.25% plus a 20% promote over a 7% pref. If the deal fails I lose the position and the ten year exclusion is worth nothing.

The other is a pooled fund, six to nine assets across three states, none of them fully identified at subscription. Fee is 2% on commitments plus a 1% acquisition fee at the asset level plus promote. Diversification is real, and if two assets miss, the fund can still work. But I'm underwriting a manager instead of a building, and the fee stack takes a visible bite out of whatever the tax benefit is supposed to be adding.

The argument for concentration: this structure asks for a ten year hold and the tax benefit only pays off on appreciation, so you want the highest conviction asset you can actually diligence, and you want fees low enough that the appreciation reaches you.

The argument for diversification: a ten year hold on one building in one tract is a very long time to be exposed to one submarket, one contractor, and one sponsor's health. Two failures out of nine is survivable, one failure out of one isn't.

Where do people actually land, and does the ten year hold requirement change the answer versus how you'd think about a normal syndication?

luis_carrera · Answer

The ten year hold does change it, and in the direction of diversification, because your exit options are worse than in a normal deal. In a regular syndication a bad single asset gets sold in year four and you redeploy. Here, selling early is an inclusion event and you lose the thing you came for, so you're structurally discouraged from cutting a loser. A pool lets the manager sell the bad asset internally without blowing up your holding period, at least in most structures I've read. Halyard, does either doc actually spell out how asset-level dispositions inside the pool are handled before year ten?

mitchell_ray4 · Answer

Four of these built already and you can check the contractor's other jobs. That's more information than I'd get on a nine asset blind pool in a year of calls. From the build side, the difference between a sponsor who has done this exact product four times and one who's assembling a pipeline across three states is enormous, and it never shows up in a fee comparison.

omar_haddad · Answer

solder's right about the contractor, but go look at the four. Were they the same unit count and the same construction type? 88 units is a different animal from 30, different lender, different subcontractor bench, different draw discipline. I've seen a very good 30 unit builder get eaten alive at 90 because the schedule assumptions that worked at small scale just don't.

I voted single asset anyway. I'd rather own one thing I understand.

ehernandez74 · Answer

I keep coming back to the fee comparison and it isn't as one-sided as it looks. The pooled fund's 2% is on commitments, so if they call slowly you're paying on money that isn't working. The single asset's 1.25% is presumably on invested capital in one deal that funds at close. Over ten years that gap compounds into a real number. Halyard, have you actually modeled both fee streams out to year ten? I'd want to see the two lines before I argued about diversification at all.

tylerbrooks9 · Answer

Split, if the minimums let you. Which they usually don't, and that's the actual constraint nobody's naming.

devon_pierce · Answer

verity's point is the one that decides it for most people. If the pooled fund wants $250k and the single asset takes $50k, the choice was made for you before you opened either document.

On the substance, I lean pooled, and it's because of manager continuity over ten years rather than diversification. A single asset sponsor with four completed projects is a small business, and small businesses have key person risk that a decade will find. A larger manager has an institution behind it. That cuts both ways on care and attention, I know.

Single-asset QOF where you can see the building, or a pooled multi-asset fund?

6 replies