Passive real estate investing involves putting capital into real estate projects managed by others, a General Partner (GP), allowing investors (LP) to earn income and potential appreciation without directly handling the day-to-day operations. You can do this through REITs or through Private Equity opportunities (Private ‘Club’ Deals).

While it offers a path to financial freedom, it requires more than just capital; success hinges on diligent research and careful selection of partners.

In syndicated commercial real estate, the GP plays a critical role, overseeing every aspect of the investment. Their experience, expertise, and integrity can make or break a project. Choosing the right GP is essential for ensuring a profitable, low-risk investment. By evaluating key factors, you can minimize risks and maximize returns. Below are the essential considerations when selecting the right GP for syndicated real estate investments.

1. Track Record & Reputation

A proven history of success is one of the most reliable indicators of a GP’s ability to deliver profitable investments.

• Past Deals: Review the GP’s history of managing deals similar to the one your client is considering. What’s the average performance across their portfolio? Assessing past successes and challenges will give you a clearer picture of their capabilities.

• Exit Strategy: Inquire about the GP’s past exit strategies. Were they able to deliver on their projected returns? What happened when a deal didn’t go according to plan, and how did the GP handle such challenges? This provides insight into their problem-solving abilities and transparency.

• References: Always talk to other investors who have worked with the GP. Hearing firsthand accounts from current or past investors can give you an honest perspective on their experience.

2. Transparency & Communication

Effective, open communication is a must when working with a GP. Your client’s trust in the investment depends on their understanding of the project’s performance and potential risks.

• Regular Updates: Ensure that the GP commits to providing regular, transparent financial updates on the investment. Find out how often they communicate and what level of detail is provided.

• Financial Reporting: Review the GP’s financial reporting standards. Are their reports easy to understand, consistent with the investment objectives, and transparent? This is essential for making informed decisions about the health of the project.

• Openness About Risks: A trustworthy GP should be open about potential risks and challenges, providing realistic assessments of the investment, rather than an overly optimistic picture.

3. Skin in the Game

A GP who invests their own capital alongside investors demonstrates commitment and confidence in the deal.

• Alignment of Interests: Ensure the GP has “skin in the game.” The more of their own money they invest, the more aligned their interests are with your client’s. A GP who is invested in the project is more likely to work diligently to ensure its success.

• Performance Fees: Understand the GP’s compensation structure. Ensure that their performance fees are tied to achieving the targeted returns, rather than simply acquiring the deal. This guarantees their success is directly linked to the success of the project.
  

4. Expertise & Specialization

A GP’s knowledge and expertise in the asset class and market are critical to successful investments.

• Industry Experience: The GP should have demonstrated success in the specific asset class your client is interested in—whether that’s multifamily, office, industrial, or retail—and a deep understanding of the local or regional market dynamics.

• Team & Advisors: A strong team is often the foundation of successful investments. Assess the team behind the GP, including property managers, legal advisors, and construction firms. Do they specialize in the type of project your client is considering? The strength of these partnerships can greatly influence the project’s outcome.

5. Financial Strength & Capital Structure

Evaluate the financial health of the GP and their approach to structuring deals.

• Capitalization: How does the GP structure the capital stack? Is the investment heavily reliant on debt, or do they maintain a healthy balance of equity and debt?

• Liquidity: Assess the GP’s financial stability and liquidity. Are they financially stable enough to weather unexpected downturns or challenges in the market? A strong financial foundation can help the GP navigate unforeseen obstacles and protect your client’s investment.
  

6. Operational Processes & Due Diligence

How thoroughly does the GP manage operations and due diligence? A meticulous approach to managing both the project and the investment process is essential for minimizing risks.

• Property Management: Does the GP have in-house management capabilities, or do they rely on third-party managers? Are they hands-on in managing the operational aspects of the property?

• Asset Management: Understand the GP’s strategy for managing the asset over time. How actively involved will they be in the property’s operations? A proactive approach to asset management is crucial for value-add opportunities, tenant relations, and cost control.

• Vendor Relationships: Investigate the strength of the GP’s vendor relationships. A trusted network of contractors, service providers, and leasing agents ensures that operations run smoothly.
  

7. Risk Management & Contingency Planning

An effective GP should have strong strategies in place to mitigate risks and handle unforeseen circumstances.

• Contingency Plans: Ask about contingency plans for economic downturns, property issues, or market changes. A good GP should be prepared to adapt if the investment doesn’t go as planned.

• Insurance & Protection: Ensure that the GP has sufficient insurance coverage, including property, liability, and business interruption insurance, to protect against potential risks.
  

8. Alignment with Your Investment Goals & Values

The GP’s strategy should align with your client’s investment goals and values.

• Investment Horizon & Strategy: Confirm that the GP’s investment horizon matches your client’s objectives. Whether your client prefers short-term gains or long-term stable income, the GP’s strategy should align with these preferences.

• Ethical Considerations: If your client has specific ethical or social considerations—such as sustainability or impact investing—ensure the GP’s strategy reflects these values.
  

9. Legal & Regulatory Compliance

Ensure the GP complies with all relevant legal and regulatory guidelines to protect your client from potential liabilities.

• OSC Compliance: Verify that the GP follows Ontario Securities Commission regulations (or other applicable Provincial regulatory body), especially if the deal involves securities offerings. A legally compliant GP is less likely to face legal complications in the future.

• Legal Disputes: Research the GP’s history for any ongoing or past legal disputes. A clean legal record is essential for reducing risk.
  

10. Exit & Liquidity Options

Understand how your client can exit the investment and their liquidity options.

• Exit Strategy Transparency: Make sure the GP clearly defines the exit strategy, including when and how they plan to sell or refinance the asset.

• Liquidity Provisions: Understand your client’s own liquidity options. Are they able to sell or transfer their interest before the deal exits, or is their capital locked in for the entire term?
  

Trust and Alignment of Interests

In the end, the best GP is one who aligns with your client’s values, goals, and expectations. By focusing on transparency, a solid track record, and careful risk management, you can help your client make informed, strategic decisions that maximize the potential for success in syndicated commercial real estate investments. Never rush the due diligence process, and always trust your instincts when evaluating potential GPs. The right GP can make all the difference in the success of the investment.

Have you considered investing in alternative assets like commercial real estate but feel you’re not as educated as should be? Are you debating over whether to dive into the real estate market now or wait for more trouble to pass?  There’s never a perfect moment, but there’s always an opportunity.

Working with an experienced advisor is critical to navigating challenging market conditions. If you’re a commercial real estate investor, we can help with negotiating lease, sales, underwriting, opinions of value, acquisition strategies or passive investing. With over 30 years of experience in commercial real estate, we provide expertise across various transaction types and markets; which equates to less risk and more options for you and your company.  

At Paramount we’re not only a Real Estate Brokerage, we are solution providers. We’re here to help you lower occupancy costs and drive value for your company. We also partner with accredited investors (retail & institutional) who are looking to preserve, protect, and grow their wealth through commercial real assets investments. Visit our website to take that first step www.paramountrealestate.ca While you’re there, watch our video on Passive Investing with us as your business partner. We look forward to working with you.