When a member engages us to monitor an Opportunity, one of the onboarding steps is to determine who all of the service providers are for that given Opportunity. Once we determine who those providers are, we will reach out to them, to the degree they are a third party, to verify that they have been engaged by the member to perform services. We do not however pass judgement on whether we believe the particular service provider is reputable and/or competent. We do however determine whether or not the provider is a related party and, if so, we will list any transactions with that affiliated firm as a related party transaction on the quarterly monitoring report.
Below is a summary of the various types of Service Providers you may see listed on an Opportunity found on a Sponsor’s Profile along with some things to keep in mind when completing your due diligence on the Opportunity or Sponsor.
A poor property management firm will lead to poor results which could impact the financial performance of the property. Make sure the Property Manager is legitimate and has a good reputation.
Look into other properties they manage and see if there are any negative reviews that point back to poor management. The Sponsor should be all over this as well. Still, I’ve seen too many times where months down the road the Sponsor is blaming the lack of results on the property manager, forcing them to switch management firms—a messy process.
This is only applicable if you are investing in an Opportunity that is holding mortgage loans or trust deeds. Many of the same issues that may apply to property managers may also apply to a loan servicer.
The job of the Monitoring Provider is to ensure that the terms of the Operating Agreement—agreed to by the GP/Manager and the LPs/Members of the Partnership—are being followed. This role is often played by a Third-Party Fund Administrator. In all cases, it needs to be performed by someone other than the Sponsors themselves.
Financial Statement Preparer
I’ve added this as a separate service provider, but it will be handled by one of three parties: the property manager, someone internally at the Sponsor, or an accounting firm.If it’s real property, the financial statements are typically being created by the property manager. The issue here is that most property managers are focused on leasing and maintaining property, not necessarily on preparing financial statements. The same holds true if it’s done internally.
This is sometimes referred to as the Transfer Agent or Fund Administrator, and many real estate investment managers handle this role internally. The job of the Investor Servicer is to process new subscription agreements and ensure they are in good order. They also conduct due diligence on new investors to ensure that they are adhering to the various regulations surrounding anti-money laundering (AML) and Know Your Client (KYC). When applicable, they will verify the accredited status of investors.
Once the investment has been made, they are responsible for keeping the capital accounts up to date, updating investor contact information and distribution preferences, preparing and sending Partner Capital Account Statements, and distributing year-end tax reports such as Schedule K-1 or 1099-INT. They will also retitle investment accounts, process transfers from one account to another, such as from an Individual account to a Revocable Trust or from an investment account controlled by one party to another unaffiliated party.
If the Sponsor is using an Investor Portal of some kind, they will also assist with login issues and assisting investors with locating information.
Tax returns are typically prepared and filed by a third-party rather than someone internal.
Not every deal will have an audit requirement. Audits make the most sense for blind pool funds that contain a large number of assets such as mortgages and rental properties. Most single-asset syndications don’t have an audit requirement.
If a Sponsor hasn’t engaged a Monitoring Provider such as Verivest to oversee the day-to-day activities, an audit can serve as the next best option. The issue with audits is that they are costly and force the audit firm to adhere to strict rules around the preparation of financials. This can detract from what most believe to be the audit’s purpose: to ensure no fraudulent activity is taking place.
The investment entity you are evaluating should be engaging competent securities counsel to represent it. This is a duty handled by the GP or Manager of the entity. Many people complain about the cost of legal services for these securities offerings. Many fail to appreciate the high cost of the insurance policies that attorneys must carry, due to the fact that if anything goes wrong with the offering, the law firm will be the first to be pulled into the lawsuit.
Look for whether or not a securities counsel appears to be reputable. The higher the quality of the offering documents, the lower the chance of something being done incorrectly, costing the partnership huge legal costs down the road. It’s insurance and cutting corners isn’t prudent.
That said, there are plenty of securities attorneys that charge way more money than they should because of their name. If the Sponsor you are working with is using either a fly-by-night operation or a white shoe firm, you will want to proceed with caution—both could be bad signs.
Bottom line: the investment vehicle needs legal representation.
Real Estate Attorney
You will also want to know who handles the real estate-specific tasks. Unfortunately, this is often a different attorney from the same firm as the securities counsel.Same thing as above. Call to confirm the Sponsor is actually a client.
This would only be applicable for an Opportunistic or Value Add deal. You want to be sure the General Contractor is reputable and has actually been engaged to lead the project. Some Sponsors may claim to be using a big-name General Contractor to make you feel better about the construction risk at hand.
LAST UPDATED JANUARY 28, 2021
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Verivest is not registered with the SEC or any similar state agency, is not an investment advisor and does not offer investment advice. Verivest does not (and cannot) recommend any of the sponsors or investment opportunities referenced on this site. All private investments involve risk and uncertainty, including lower than projected returns and a complete risk of loss of invested capital. Investors should conduct thorough due diligence and consult with qualified legal and financial advisors before making any investment decisions.