Before each deal goes live on the CrowdStreet Marketplace, our Investments team thoroughly reviews the sponsorIn commercial real estate, the sponsor is an individual or company in charge of finding, acquiring and managing the real estate property on behalf of the partnership. The sponsor is usually expected to invest anywhere from 5-20% of the total required equity capital. They are then responsible for raising the remaining funds and acquiring and managing the investment property’s day-to-day... More, market, and business plan. As part of that review process, we look for attributes that signal whether the deal will be a good fit for the Marketplace.
Going forward, we’ll be sharing more of this data on every deal’s offering page as part of the new CrowdStreet Review Snapshot, providing investors with an overview of the key attributes that make a Marketplace deal stand out relative to others.
The CrowdStreet Review Snapshot highlights nine metrics that are coreCore commercial real estate investments are the least risky offering. They are often fully leased to quality tenets, have stabilized returns and require little to no major renovations. These properties are often in highly desirable locations in major markets and have long term leases in place with high credit tenants. These buildings are well-kept and require little to no improvements... More to our deal review process. In this article, we outline many of the criteria we’re looking for and why we believe it’s important for investors to understand. We want to make it easier for you to run your own review process, so you can determine if a deal is the right one for your portfolio.
| Category | Criteria |
|---|---|
| ULI Top 25 Market | Receives a check if the property is located in a top 25 ULI Emerging Trends market. |
| Weighted Avg. Lease Term (WALT) | Receives a check if the WALT is equal to or greater than 4 years. |
| Sponsor Co-Investment | Receives a check if the sponsor co-invest is greater than 10% of total equity. |
| Credit Tenancy | Receives a check if credit tenants account for 40% or greater of Effective Gross Income. |
| Occupancy | Receives a check if current occupancy is equal to or greater than its submarket average. |
| Loan Term | Receives a check if the loan term is greater than the targeted holding period. |
| LeverageLeverage is the use of various financial instruments or borrowed capital to purchase and/or increase the potential return of investment. Assume a buyer puts 20% down on a $5M property. Essentially, they paid $1M to own something worth $5M. Assuming the property appreciates at 5% per year, the sponsor’s net worth would grow to $5,250,000 in a year. Had they... More | Receives a check if the property is below 70% loan-to-cost ratio (LTC). |
| Sponsor Experience | Receives a check if the sponsor has a total market cap experience of $1B or greater. |
| Building Rating | Receives a check if the building is rated 3 stars or better according to CoStar’s building rating score. |
Note that the CS Views Table is intended to provide a high-level view of a number of the factors the CS Investments team considers in evaluating offerings for the Marketplace; it is not intended to serve as investment advice or a recommendation with respect to a particular Marketplace offering. Investors must make their own determination as to whether to make any investment, based on their own independent evaluation of the investment and their risk tolerance.
Notes on each metric:
ULI Top 25 Market
The economic environment and prospects of a sub-market have strong implications on the overall health of the commercial real estate market. There are many factors that go into evaluating a sub-market including; supply and demand, demographics, job growth, infrastructure investment, education levels, quality of life, employment base, political landscape, and geography, among others. The Urban Land Institute’s (“ULI’s”) Emerging Trends in Real Estate captures these factors and ranks their top markets on an annual basis. We view the top 25 ULI markets as an important factor to consider when evaluating an investment opportunity.
Weighted Average Lease Term
Before tenants occupy a space they sign a contract (lease) obligating them to pay for the use of the space in the form of rent. The lease outlines the terms of the arrangement and provides visibility into the rent the landlord anticipates coming from tenant leases. A weighted average of all tenant leases provides insight into how predictable future revenue streams will be over the course of owning a building. The shorter the weighted average lease length, the less predictable future revenue stream.
Sponsor Co-Investment
We know that investors like sponsorsIn commercial real estate, the sponsor is an individual or company in charge of finding, acquiring and managing the real estate property on behalf of the partnership. The sponsor is usually expected to invest anywhere from 5-20% of the total required equity capital. They are then responsible for raising the remaining funds and acquiring and managing the investment property’s day-to-day... More to have skin in the game. Since we typically seek a 10% sponsor co-investment that will often trend down to 5% as deal size scales, a co-investment above 10% is noteworthy and something that investors would like to see called out.
Credit Tenancy
Credit ratings are generally provided by third-party rating agencies such as Moody’s, Fitch, and S&P. A credit tenant is a lessee that has an investment grade rating from one of these major rating agencies. Credit provides insight into a tenant’s ability to make rent payments. The higher the percentage of the revenue stream coming from credit tenants, generally, the less probability tenants will default on paying rent and negatively impact the revenue stream.
Occupancy
If a tenant is occupying a building, then they are most likely paying rent. This provides a level of certainty of income that is greater than a building that has substantial vacancy. In addition, if a building is fully occupied, it provides greater assurance that tenants are attracted to the property and are willing to pay rent to occupy it. Therefore, a building whose occupancy is equal to or greater than the current submarket average has a higher probability of being one of the more desirable properties within the given submarket.
Loan Term
Debt markets can be fickle and future liquidity within them difficult to predict. If markets shift and liquidity is diminished, refinancing a property may be challenging or it may occur at terms that are inferior to previous expectations. Any property that has a loan in place with a maturity date that exceeds the targeted holding period has one less major variable to solve in order to achieve its targeted returns.
Leverage
Adding debt to a capital structure can be beneficial by increasing returns and reducing taxable income when times are good, but during downturns, leverage will amplify your losses. Further, the greater the amount of leverage, the greater the risk that a property owner won’t be able to service its debt in the event of a drop in occupancy or rents, an increase in operating expenses, or some combination thereof. Debt payments are generally fixed and if the net operating incomeNet operating income (NOI) equals all revenue from the property minus all operating expenses. In addition to rent, a property might generate revenue from parking and/or service fees such as laundry, housecleaning services, pet rent, and more. Operating expenses include the costs of running and maintaining the building and its grounds, including insurance, property management fees, legal fees, utilities, property... More from the property decreases, defaults can occur. Remember that debt increases risk for the equity investor, hence why investors will generally demand a higher return as leverage increases.
Sponsor Experience
Expertise in commercial real estate is typically obtained through experience and, in particular, across multiple real estate cycles. Sponsors with $1 billion or more of total transaction experience have proven that they can acquire, operate, and divest of commercial real estate. The experience provides confidence to the most sophisticated investors, including institutional equity investors and lending institutions, such as banks. Generally, obtaining this type of experience has created relationships and trust with capital sources, which can provide negotiating benefits and bring favorable terms to a project.
CoStar Building Rating
Buildings are rated through an examination of the design and construction of a building. For example, the type of exterior materials, the quantity and quality of windows, and the lobby finishes present in office buildings; the ceiling height and number of loading docks in warehouses and distribution centers; the entrances and parking areas for retail properties; and the types of finishes offered in the units of multifamily buildings. These examples, as well as many other factors, all have an effect on a building’s rating. The multitude and diversity of decisions that are made when designing, constructing, renovating, and managing a building creates a built environment in which no building is identical to another, even when of the same property type. However, CoStar tracks the entire range of buildings, from skyscrapers in large cities to single story buildings in smaller markets. To effectively categorize buildings within this wide range, a national rating system, such as CoStar’s, is necessary.
It will be nearly impossible for a single deal to check every box–certain offering types are more likely to check some boxes, while other offering types check others. For example, core and core-plusCore-plus commercial real estate investments are known as “growth and income” investments. The cash flow is less predictable, but they often predict a higher rate of return than core investments. The term "core plus" was originally defined as "core" plus leverage. Leverage is the use of borrowed capital to purchase and/or increase the potential return of an investment.... More offerings may check more boxes than value-addProperties are considered value-add when they have management or operational problems, require some physical improvements and/or suffer from capital constraints. By making physical improvements to the asset that will allow it to command higher rents – remodeling the kitchens in multi-family, installing more energy efficient heating systems in a medical office, etc. – improve the quality of tenants and increase... More or opportunisticOpportunistic real estate investments are the most high risk/high reward investment opportunities, requiring major development work. Opportunistic properties tend to need significant rehabilitation or are being built from the ground up. They have the chance to reach the highest rate of return for investors, but they little to no in-place cash flow at the time of acquisition and have the... More offerings do (on average) due to their risk profile. The intent of the CrowdStreet Review Snapshot table is to educate investors about some of the key aspects of risk in offerings by shedding light on a number of the criteria our Investments team considers in their review.
