Proven sponsor with a thin deal, or an unknown sponsor with the better numbers

The first sponsor published a 0.94x. That's the sentence that would decide it for me. Almost nobody shows you the one that lost money, and a team that does is telling you what their reporting will look like when your deal has a bad quarter.

Tertiary market and 62 units, what's the exit look like? In small markets the buyer pool for a 62 unit at year four is maybe six groups and two of them are the seller's friends. A 22% discount to comps might just be what tertiary illiquidity is worth.

Doesn't the catch-up on deal one basically erase the pref advantage? I've been trying to work out how much a 50/50 catch-up actually costs and I keep getting numbers I don't trust.

@kestrel it depends on how far past the pref the deal lands. At a 13% gross the catch-up matters a lot. At 9.5%, which is bramble's haircut number, you barely reach promote at all and the catch-up is close to irrelevant. That's the part that's odd about deal one: bramble's own downside case makes the sponsor's economics almost entirely fee driven rather than promote driven, and a sponsor earning from fees has different incentives about holding versus selling than one earning from promote.

Eighteen months as an entity means no full audit cycle and probably no experience of a capital call as the decision maker rather than the analyst. Running acquisitions for a big shop is a different job from telling forty investors that distributions are pausing.

I own small multifamily and I'd point out that 1980s garden apartments are a known quantity in a way that pencils. You can price the plumbing risk on that vintage because everyone has been wrong about it before. The newer vintage 62 unit has less to fix, which is also less to add. Where does the 2.1x actually come from on the second one, bramble? If it's mostly cap rate compression at exit I'd stop reading.

Whoever is managing on the ground matters more than either of these track records and neither of your paragraphs mentions it. Third party PM or in-house? A two person shop in a tertiary market is hiring a local manager they have no history with, and that relationship is where a value-add plan lives or dies.

I'd want the second sponsor's separation agreement terms, or at least whether they can legally reference the prior deals. When people spin out and the old firm's numbers show up in the deck, sometimes there's an arrangement and sometimes there's a letter coming. Also check whether their pref compounds and whether it accrues on unreturned capital or on original capital, because at a 9% pref over four years that wording is worth real money. Voted for the new sponsor, with the caveat that I'd want a personal guarantee on the recourse carve-outs before I believed anything.

Curious whether the platform underwrote both, or whether one came through a different channel. Do the portals actually diligence a first-time entity differently?

Five years running my own shop taught me that the first two years of any business are spent discovering costs you didn't budget. That applies to sponsors as much as to service companies. The eighteen month old entity is still finding out what its own overhead is, and asset management fees on one deal don't cover a two person firm. They need the next three deals more than they need this one to go well, which cuts both ways.

Voted split, mostly because bramble wrote three paragraphs about deal two and one about deal one and then said he doesn't know. You know.