After closing on an apartment syndication deal, one of the responsibilities of the general partners (GP) is to provide the limited partners (LP) with ongoing updates on the investment.
One aspect of passive investor communication is providing financial reports on the asset. Not all general partners provide financials to limited partners. However, when they do, there is an increase in trust between the GPs and LPs, which is the number one reason why passive investors choose to invest with one operator over another.
The purpose of this blog post is to outline the process of providing your investors with deal updates by sending them financial reports.
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What Financial Reports to Send to Passive Investors
The reason to send passive investors financial reports, aside from increasing transparency and trust, is so that they know what is going on with the investment. The information provided in monthly or quarterly recap emails is a good start, but a spreadsheet with hundreds of data points paints a more detailed picture of the asset’s operations.
Ultimately, how often you send financial reports and the types of financial reports you send are up to you and the preferences of your investors.
The two most relevant financial reports to send to passive investors are the rent roll and the T-12.
A rent roll is a document or spreadsheet containing detailed information on each of the units in the apartment community, along with a variety of data tables with summarized income. The rent roll provides passive investors with a current snapshot of the investment’s revenue.
A T-12 is a document or spreadsheet containing detailed information about the revenue and expenses of the apartment community over the last 12 months. Also referred to as a trailing 12-month profit and loss statement, the T-12 provides passive investors with current and historical revenue and expenses.
A best practice is to send financials at least once a quarter.
How to Obtain Financial Reports
The first step in the process starts before you even have a deal. Most likely, the financial reports will be generated by your property management company. When interviewing property management companies, make sure you set expectations. First, ask them what type of property management software they use and if it can generate custom financial reports. Ideally, they provide you with a sample rent roll and T-12. If they do, how detailed are the reports? Is the T-12 broken down into specific line items? Does the rent roll list out all of the important metrics?
Assuming they generate the right reports, the next questions to ask are, “Will you send me financial reports upon request?” and “What is the lead time?” In doing so, you will know if they are willing to send you financial reports and how quickly (or slowly) you can expect to receive them.
How to Send Financial Reports to Passive Investors
One approach is to include links to download the financials in the monthly or quarterly recap emails.
Create a Dropbox folder for each of your properties. Each quarter, upload PDF versions of the rent roll and T-12 to the property’s respective Dropbox folder and include the links in the recap email. For example, include a sentence like, “Also, you can download the quarterly financials (current rent roll and profit and loss statement) by clicking here,” and the wording “clicking here” is hyperlinked to the financial reports.
Another more advanced and efficient option is to upload the financials to an investor portal. Rather than linking to the financials in your recap emails, you can direct the passive investors to the portal.
Before sending the financial reports, make sure that your residents' and investors' personal information is removed. Sometimes, the investor distributions will be included at the bottom of the T-12. Only include the line items above the net operating income. Also, make sure you remove the variance column from the T-12. Your property management company’s software may include a column that has the difference between the actuals and the project (i.e., the variance). To avoid confusion, remove the variance column and only send it to investors upon request. Consider removing the names of residents from the rent roll, too.
How to Handle Passive Investors’ Questions About Financials
Like any questions received from investors, if you know the answer, reply in a timely fashion. If you don’t know the answer, reach out to your property management company.
The most common question you will receive from investors will be about how the T-12 actuals compare to the projections you provided in the PPM. If you are not hitting your projections, speak with your property management company to determine why there is a variance and what is being done to solve the issue. The best responses to investor’s questions include a diagnosis of the issue as well as the solution, which should already be implemented.
About the Author:
Joe Fairless is the co-founder of Ashcroft Capital, a fully integrated multifamily investment firm with more than $2.7 billion in assets under management, and the founder of Best Ever CRE. His podcast, the Best Real Estate Investing Advice Ever Show, is the world's longest-running daily real estate podcast with more than 500,000 monthly downloads.
Disclaimer:
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.
