Before each deal goes live on the CrowdStreet Marketplace, our Investments team thoroughly reviews the sponsor, 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 core 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. 

CategoryCriteria 
ULI Top 25 MarketReceives 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-InvestmentReceives a check if the sponsor co-invest is greater than 10% of total equity.
Credit TenancyReceives a check if credit tenants account for 40% or greater of Effective Gross Income.
OccupancyReceives a check if current occupancy is equal to or greater than its submarket average.
Loan TermReceives a check if the loan term is greater than the targeted holding period.
LeverageReceives a check if the property is below 70% loan-to-cost ratio (LTC).
Sponsor ExperienceReceives a check if the sponsor has a total market cap experience of $1B or greater.
Building RatingReceives 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 sponsors 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 income 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-plus offerings may check more boxes than value-add or opportunistic 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.