ST. PETERSBURG, Fla. – April 13, 2023 — General partners should ramp up their outreach to multifamily and commercial real estate co-investors at a time of rising concern about the economy, advises CREModels Managing Director Michael Harris.
It’s one of several tips Harris offers in “Real estate GPs need to get out their defensive playbooks”—a column in the Capital section of Multifamily Dive.
A 30-year veteran of CRE and tech, Harris writes that GPs can protect their interests by playing smart defense. The first step is to dig into the original investor waterfall structure to get ahead of any issues that might arise.
“A central focus of the waterfall analysis should be to evaluate the effects on GP and LP returns of potential valuation and cash-flow scenarios,” he explains. Third-party analysts at firms such as CREModels routinely review partnership agreements and develop comprehensive what-if scenarios for clients. These projects “can help GPs protect the interests of their LPs and build a more resilient and successful real estate fund for the long term,” Harris notes.
Good relationship management also means being transparent about the fees charged by the fund while calmly and clearly communicating with LPs about the risks and potential rewards of investing in multifamily and commercial real estate, he adds.
GPs also should carefully review the financial and operational covenants to which they have previously agreed with lenders (bank and non-bank). Clearly understanding these provisions can reduce the odds of running afoul of them.
When times are tight, less-regulated non-bank lenders face a greater risk of runs, Harris notes. On top of that, rate increases tend to undermine new demand for the investment products they offer.
“It can be harder for them to recycle capital or endure unexpected changes in payments,” Harris explains. “Moving forward, some lenders might respond by being more ‘opportunistic.’ In other words, if they can get their hands on an asset after a borrower defaults, they just might do it.”
Analysts can review bank and non-bank obligations and design models to track covenants and responsibilities in areas such as debt service, liquidity and loan-to-value ratio. They also can clarify reporting requirements to help GPs form strategies for handling unavoidable defaults.
Making smart moves today can pay strong dividends tomorrow, Harris concludes.
“LPs will remember those GPs who communicated proactively, backed up their assertions with bulletproof analytics and stress-tested and adjusted their strategies during a difficult or uncertain time. And guess who they’ll partner with when it’s time to start playing offense again?”