GI304: Passive Investing in Real Estate with Aleksey Chernobelskiy

GI304: Passive Investing in Real Estate with Aleksey Chernobelskiy

Aleksey Chernobelskiy advises passive investors on existing and future investments and is the founder of GP-LP MATCH, a platform that allows LPs to see deals that match their specific investment criteria. Additionally, he writes weekly to 7,000 investors on his website, LPlessons.co, to explain how to properly vet and consider LP investments in the grand scheme of their portfolios. Prior to advising LPs, he ran STORE Capital’s $10 billion commercial real estate portfolio and oversaw the firm’s underwriting team.

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Transcript:

Charles:
Welcome to another episode of the Global Investors Podcast. I’M your host, Charles Carillo. Today, we have Aleksey Chernobelskiy. He advises passive investors on existing and future investments and is the founder of GP-LP MATCH, a platform that allows LPs to see deals that match their specific investment criteria. Additionally, he writes weekly to 7,000 investors on his website, LPlessons.co, to explain how to properly vet and consider LP investments in the grand scheme of their portfolios. Prior to advising LPs, he ran STORE Capital’s $10 billion commercial real estate portfolio and oversaw the firm’s underwriting team. Thank you so much for being on the show!

Aleksey:
Hey, thanks for having me. It’s nice to be here. And

Charles:
So you have a very interesting background before getting involved with what you’re doing now, which is also very interesting. Can you tell us a little bit about yourself personally and professionally and prior to just what, what led you into the real estate space? Yeah, I,

Aleksey:
I, I was doing all types of investing before really all types of investing was the exception of real estate, to be honest. Started in algorithmic trading, did some distressed debt turnarounds yeah, like basically touched a lot of different worlds. And then when I moved to Arizona, I joined Store Capital. It’s the most recent experience that you mentioned. That was sort of my really my introduction to real estate. And also I was lucky to do it at the institutional level. Obviously this was not my firm. It was a REIT that I was a part of. I was an employee and, you know had an amazing experience. Happy to shut through it, if would be helpful. And then left and started what I’m doing now.

Charles:
So can you tell us a little bit about what Store Capital is what kind of read it’s or real estate investment trust kind, what is their asset classes are focusing on? And kind of I know we touched that you were doing underwriting there, but if you can kind of go in a little bit more depth of what you were, kind of, what your role was there.

Aleksey:
Sure. so a REIT is a real estate investment trust. There are public REITs and private REITs. For now I’ll talk about public REITs. I, they’re treated on some exchange. We were a public read store stands for single tenant operating real estate which basically means we bought single tenant buildings where the operations, that’s the operating part was like the, the key component of that business being in that property. So just to give you an examples you know, by the time I left, I wanna say we had like 2,900 properties give or take across the us. We typically bought somewhere between a billion to 2 billion a year. Average check size is surprisingly small, like probably like 10 to 15 million each. Right. But we did a lot of volume. And yeah, it was a fascinating experience.

Aleksey:
In terms of my role specifically, I ran two separate teams, but they were like very related in that anytime a deal came in like so a sales person would find the deal, it would come through my department to underwrite the deal. Like I managed a team of 20 people that underwrote across a ton of different industries. We had like over a hundred different industries, if I can recall that correctly. And and once, once a property would close, it would go to closing. Once it would close, then it would come back to my team to manage which was the portfolio management group. And there, you know, had a bunch of people as well. They, the same 20 people sort of floated between underwriting and portfolio management as necessary.

Charles:
What were some of your main takeaways from working on a publicly trader reit?

Aleksey:
I’ll, I’ll tell you one that’s I think very relevant to LPs NGPs is I actually wrote an article about it a few days ago, maybe a few weeks ago. I think I, I, I labeled the article, deal Flow Rules the World and it’s, it’s a little tongue in cheek, right? But one of the things that I saw and honestly didn’t really appreciate at the time was we were a public reit. You know, we had like, I think a billion or two on a revolver that we could pull at any point, like essentially, like for all intents and purposes, like an endless amount of cash, right? And what that meant is when someone thought of a sell leaseback, which is what we did, like a single tenant building type of acquisition, one of the first three thoughts that would pop into their head is like, man, I really hope like maybe store should buy it.

Aleksey:
Like they’re, they’re easy to deal with, they don’t need debt, they’re not gonna give a debt contingency, right? And so because of that, and there’s a bunch of other reasons, but like, because of that we just got a ton of deal flow. Like, I think on an average week, my team was probably underwriting between five to 20 deals. That’s an average week. And that means that’s after the sales person thought it was interesting enough to underwrite, and they probably went through, you know, 10 to 20 to 30 deals to get to one of those. You get what I mean? So I think that’s just like a very important principle for both the GP side and the, and, and, and the LP side, which I, I think LPs don’t appreciate that enough. You know, it’s like they, they, they see a deal that like falls into their lap and they’re just like, oh, like, okay, like I should invest before someone else does. And it’s the first deal I’ve ever seen. And it’s like, oh, I don’t know. Not sure. <Laugh>.

Charles:
Yeah. It’s that makes perfect sense. It’s like so you have 400, 500 a week of deals that your team is looking at, as you’re saying it, 20 of ’em are getting to kind of underwriting stage, like a full underwriting stage, and you might be closing on a, a very small percentage of those. So it’s really, I mean, you’re like less than 1% on deals, you’re really closing that you’re really sorting through to find something that really checks all the boxes on your underwriting.

Aleksey:
Yeah. Like, it, it’s a, it’s a pretty intense process, and I, I think it shouldn’t be that way. And, and the only way to, the only way to stay competitive while rejecting so many deals is being able to close. Like meaning if, if people, the counterparty, whether that being the seller or the broker that’s involved, know that when they pick up a, you know, when they pick up a phone and call you, you’re gonna be honest with them and you’re gonna be quick on response times regardless of your decision, right? That builds credibility and over time, like you just naturally start getting more and more and more, and as long as you’re being transparent with people, and even if you’re rejecting, like you said, like 90%, 95%, whatever the number is people still have tremendous respect for like the speed and the transparency that you give them.

Charles:
Yeah, that’s, that’s for sure. Every time I talk to brokers and they’re weeding out new investors, it’s always their for example, it’s something like, you know, they don’t respond. They send a deal, they never hear back, goes into the lack hole, and the people weren’t serious about buying and they never hear back. But if you’re write back with some sort of, so many times I’ve been thinking for just writing back, like, no, it doesn’t fit like these, you know, bullet 0.3 things, like something quickly we saw, you know what I mean? And you’re done with it, but most people don’t do that apparently. So it’s put you above the rest of the pile. One thing that you kind of gloss glossed over really quickly there that we hadn’t really spoken much on the show, on the show about was at Store Capital, what you guys were kind of providing a service and that was a sale leaseback, which obviously what you’re doing is in the name of what the, the term is. But can you explain a little bit about what that is and why a company would bring in store capital to assist them with that?

Aleksey:
Sure. I think the easiest way to think about sell’s back is it’s like, it’s a form of leverage, right? But it’s, it’s, it’s an alternative to your bank loan, right? So you have a business for simplicity’s sake, let’s say you’ll run a childcare with like 10 locations. You wanna grow to 30 locations over the next two years, right? And so all of your real estate currently has mortgages on it. And let’s say for the sake of example, all of it is 70% owned to value, right? So that means you have 30% equity tied up in those buildings, right? And, and in the meantime, you want to grow, right? So store had a solution for both of those things, right? So on your existing portfolio, in other words, even if you don’t want to grow, we could cash you out of, let’s call it a hundred percent loan to value, which is just, we own the building outright for whatever the value is with the proceeds.

Aleksey:
Obviously you pay off the existing loans that 30% is now yours. And I mean, you can do whatever you want with it. You can reinvest it into the business, grow the footprint. You could, I don’t know, buy Bitcoin if you want <laugh>, not investment advice, <laugh>. But, but so that’s like solution one. In other words, it’s, it’s really like liquidity at a much higher loan to value number in a sense that a mortgage would never provide, right? And in the meantime, we write like a 15, somewhere between a 15 to 20 year lease, which gives you security in the fact that you can stay at the location for a long time and like you’re not gonna kick out, right? So that’s on the existing footprint for future buildings. Like if you, if you have a building under contract, so let’s say you’re buying a business or childcare, you know, down the street and it’s 5 million bucks for the business and the property.

Aleksey:
And so typically what you would have to do is go to a lender like, and say, Hey, like, you know, the lender will say, I’m willing to lend, you know, this much on the business and this much on the real estate, right? When you come to us, like we would take the entire real estate footprint down ourselves, right? So we buy the building at close in conjunction with the, the operator buying the operations. We own that property, lease it to you, right? And then you own the opco, obviously, and, and you get the benefit of it. And so you, you, it’s really like, again just to reiterate, it’s, it’s like a form of leverage. And if you are EE either if you need liquidity to diversify your net worth, I think is a good solution, or if, if you’re trying to grow fast it can be like a very effective way to sort of get your dollars to run out or run more, you know what I mean? You’re, you have a much more efficient return on equity because your dollars are not tied in real estate stuff. If, if you have a million bucks and you can invest it in the opco, those returns will be much greater if you do a good job than investing in, than tying it up in a real estate with like a bank loan. You know what I mean? Yeah. I also

Charles:
Think it simplifies your operations a little bit. You’re, say you’re in the restaurant business and you’re in the real estate business. ’cause Now you own it and now you’re just back into fully the restaurant business, and it’s now one of those things where you clean up a little bit of your operations as well. Yeah. So your focus, I guess you would say, yeah, it

Aleksey:
Helps. I like, I, I don’t think it helps maybe as much as you’re saying the, the, the, the leases are triple net. So like if there’s issues with the buildings, you still have to deal with them. You know, so like it’s, I, I don’t wanna overstate that part, but, but there’s some truth to that. Like it’s, it’s beneficial to, for example, like have one landlord where you’re sending one check per month as opposed to like 10, right? There’s like things like that, like you can partner with your landlord to like add onto your building, for example. We did all types of stuff like that. If you have a new acquisition, you don’t need to call, you know, 10 local lenders, you just call us. And, you know, again, like we basically had like endless liquidity <laugh>. So yeah, no, that’s a great, great business plan. So kinda

Aleksey:
Moving forward can you tell us a little bit about what you’re doing now and tell us about LP lessons, why you launched it, and what you do there? Yeah so what I do now is advise LPs that is on the existing investment side and future investments. In other words, if, if an LP has an existing investment that they need feedback on in terms of valuation, capital call, whatever it may be, I give that feedback. If they have a new investment that they’re considering and they want feedback, I do that as well. LP lessons really started I I guess getting close to 18 months ago as a result of a lot of people just telling me like, Hey, I’ve, I, you know, I’ve been following you on LinkedIn, Twitter, like you have a lot of interesting things to say, but I just, I’m not an LT yet, or I’m not liquid currently.

Aleksey:
But I just wanna learn, like, is is there a place for me to go to learn more about things that you’re seeing in the market and whatever, whatever. And, and so that’s, that’s how I started it. You know, I started it to basically give people LP lessons, <laugh>, that was, that, that was the exact i, I guess, idea behind the title. And, you know, day to day I speak to a lot of LPs. Some have really good stories, some unfortunately have really sad stories, right? And the whole premise is if I can keep the confidentiality right of, of those conversations, anonymize them in a way that still helps other LPs avoid those types of problems in the future. Like, I, I think that’s pretty cool, you know, if, if I can sort of do that at scale and yeah. So I mean that’s how, that’s how it started. Yeah. No, that’s a fantastic

Charles:
Business and kind of a assistance that you’re providing to LPs. It’s not really out there that much. One of the things for people that have passively invested in real estate over the last few years, it’s been for many of those investors kind of a bumpy ride and kind of littered with some unexpected capital calls. You know, how do passive investors assess the decision to invest in a capital call? And I mean, how would you do that if someone came out to you and explain to you?

Aleksey:
Yeah, good questions. <Laugh>, I’ll start with the basics. I think the first question, I, you’re gonna laugh at some of this stuff, but like, first of all, you should make sure that you have the money, okay? Like, I’ve had people call and they’re like, should I borrow on my 401k in order to meet this capital call? I’m so scared of this email. Like, I don’t want to have a foreclosure. And, you know, jokes aside, like I, I think sometimes gps don’t understand fully like the, the emotions that NLP goes through when, when they get one of those emails and they don’t, half of them give or take, don’t understand that losing money was a possibility. In other words, when you speak to retail LPs, it’s not uncommon for them to say something along the lines of, well, I thought the worst thing that the, the, for the, the worst thing that can happen is I just get my money back and don’t get a return.

Aleksey:
So like, okay, I’ll just get my money back. You just sell the property and you pay off the loan. What’s the big deal? Right? But, but of course it’s not how, unfortunately, that’s not how things work. And there’s a lot to investments and, and risk, right? Back to capital calls I think the, the most important thing to figure out there, there’s really a few, and I’ve I’ve written, I think, I think seven articles at this point on capital calls alone, because how do I say this nicely? Sometimes they’re, they are they’re slightly deceptive <laugh>. And, and by the way, just while we’re on the topic, one of the reasons why they might be deceptive is because there could be a misalignment of interest between the GP and the LP at the time. The capital call comes, meaning the LP and the GP might have very different incentives and, and the more distressed the property gets, the more those incentives get misaligned, right?

Aleksey:
And of course this is putting ethics aside, right? You hope people act ethically and they are above the board. But just in practice, I can tell you, you know, sometimes that doesn’t happen. Okay? in terms of just like steps to think through on, on capital calls, again, the, the, the very basic step is just making sure that you have the money, right? The, the second step is like, what happens if I, if I don’t invest, right? Like, you’d be surprised how many times that’s not clear. Like, is there a dilution penalty? Is there no penalty? And you just get diluted by the new investors that come in, which is very logical. Like if, if you need more equity, you get diluted, that’s normal, right? What, what’s, what’s the security type, right, of this new investment? Is it debt and therefore it’s senior to what you’re doing previously, right?

Aleksey:
Which was equity, I’m assuming. Or is it the same equity that’s parapa sue, IE the same, let’s call it as, as your original equity? A few other things just to quickly to consider is will this be the last capital call <laugh>, right? Like how, how how likely is it based on what you know about the property and the debt and the maturities coming up? Is that like the GP will call you in in six months and be like, oh, hey, like thanks for helping us, like things are doing great, but we need more money, right? And I’ve seen that, like, you know, and to be clear, nothing wrong with that, but the beautiful thing about real estate is, you know, your deadlines, you know, your deadlines years in advance usually, unless you like hit a covenant or something, right? So and, and the last thing I’ll add there, there you, you can tell there’s like really, like we could do a whole podcast on capital calls, but the last thing I’ll just add is like, you should probably have a decent understanding of where your existing money sits.

Aleksey:
Like if they were to sell the property today, realistically speaking, what’s happening with the cash? Is this a capital call where you have a realistic chance of getting your money back, right? Or is this a capital call where you might get your marginal capital call money back, but you basically have zero chance of getting the original money back? I’ll take questions now. <Laugh>, <laugh>, that’s

Charles:
A lot of great information. One thing that’s right. That was

Aleksey:
A lot.

Charles:
No, it’s fine. As an LP investor, I’ve gotten hit with two capital calls. We’ve never had one as a with, with our, any of our GP deals, but the LP deals, one thing I’ve always seen is like you know, the use of funds and finding out kind of where those are going. And one I invested in one, I didn’t because you kinda see how much money’s going back and just like GPS pockets that were funding part of it or something like this, you know, sometimes they have capital calls and some of it’s going to repay loans that the gps were putting out to the property. You know what I mean? Not so much going back to the property, which is not really what you wanna see, you know, I don’t wanna see. So I

Aleksey:
Actually think that topic is very intricate. I I, I wrote like a whole long article on this because technically speaking, and we can move on if you’d like. I just want to make a quick note. Like technically speaking, the GP did not need to fund that money, right? So you could understand how the GP could argue, like, what do you mean you care about paying me back? I didn’t have to fund that money in the first place, right? And I think that’s a reasonable take from the GPS perspective. Now, from the LP perspective in other words, let, let, let’s, let’s do a simple example like the GP funds, whatever capital is necessary, and a week later they send you a capital call and part of the uses is to pay them back. Do you care? Probably not, right? It’s like they, they just funded it when they needed it at the moment, right?

Aleksey:
And they just basically fronted the cash and, but it’s clear that like they’re in communication and they’re telling you what’s going on and they need to get paid back, like they weren’t supposed to put the money in, right? That it’s not their job, so to speak, right? Now if I told you like a year passes and all of a sudden you get like, you know, an email, it’s like, Hey, we need a capital call. Oh, by the way, like in the uses there’s like miscellaneous expenses for $10 million and you’re like, Hey, what is, what is that? They’re like, oh, we’re just paying ourselves back. Oh, you lent a loan? Like you, you sent the loan out to this property? Oh, yeah, yeah, we did that like a year ago. Oh, and like in the past year, you’ve been sending us reports saying everything is fine while you’re funding capital losses.

Aleksey:
Like, so you get what I’m saying at, at some point, like the, the way that I phrase this in article is like, partnership goes both ways, right? And so if, if you’re being transparent about funding it first, I think in some sense LP should actually appreciate that you’re funding a gap. But the key is transparency. Like you have to be transparent at the time that you actually funded that loan. And, and don’t be shady about like, you know, the uses. I, I see that all the time. Like half the time the sources and uses aren’t even there the other half the time. Like, you know, it’ll be some like pseudo name and it’s not clear where the money is going, so people have to ask, you know, so

Charles:
Yeah, no, and, and my, the one I did fund, it was one of those things where, you know, 80% was going back to property and one way or fashion or to pay down some debt, and 20% of ourselves was going back to LPs and or to the gps, and it was clearly stated. So I did fund that as just, you know, with another sponsor. They weren’t as transparent, let’s just say as they should have been as the first one. But so kind of moving forward to people that are investing for the first time as an lp or maybe they’re trying to fine tune like their investment philosophy around LP investing. What would you say are some strategies for LPs to, you know, avoid common investment mistakes other than, you know, a lack of transparency at deal level when you’re looking at a pro a property or a deal?

Aleksey:
I, I think the, the first place to start is actually not the property. And I, I, I, I hold, I, I I, I, I, I, I’ve been like trying to sort of preach this for a while and I think some LPs are still not totally understanding it. I think people think when I’m investing in a property as an lp, the most important thing to look into is the property. And I deeply disagree with that. In fact, I have like, I have a three pillar system, and the last, and therefore least important, it’s not that it’s not important, it’s just the least important is the property. And the other two that come before that is like, who are you investing in? Do they know what they’re doing? Have they done this before? Right? what, what’s the alignment of interest looking like, right?

Aleksey:
Between the fees, the, the, the waterfall structure that’s put in place and the co-invest from the gp, right? And then once you get to those, to through those two things, then you start like actually analyzing the property. And I can tell you just from, you know, advising a ton of LPs, many investments don’t get to step three, like probably seven out of 10 deals that I look at. It’s hard to get to like the proforma. It’s just, it’s really hard. Like you have so many questions on the first two steps where maybe people aren’t being honest about their track record, maybe like they’re overstating their level of experience. Like there’s so many questions before you get to the perform itself that you’re just like, well, let me see how they answer these things and I might not even get to the model. Right?

Charles:
Right. What’s the, what’s some of the best ways, I mean, vetting deal operators, I mean, that can be a, before we even get into the deal itself, like you were saying, what are some of the ways of like other than speaking to previous investors, which can be, if you’re getting the names from the in Yeah. If you’re getting the names from the gp, that can be difficult. Yeah. what other ways would you say suggest to someone you know, vet, vet a deal sponsor?

Aleksey:
I think it’s important to remember that you’re vetting honesty, right? That’s actually what you’re vetting, I think. And you, sorry, two things. Experience and honesty. Those two are separate things, right? So let’s, let’s speak about both. So in terms of experience, if you get the sense that like the experience section is being overstated, like for example, you notice that they have 20 exits, and then you Google one of those exits and you notice that like they weren’t the GP on that exit. Perhaps they were a cog p through a feeder fund, or perhaps they were an lp. Now, I always like to say this, and I really believe it’s true, all experience is helpful, but it’s not the same, right? And so if, if, if I’m presented a deck and it, it, you make it appear as if you sold all these deals as the main gp and it turns out that nine out 10 of them you were like, you know, a $50,000 LP investor, then it’s, by the way, I’ve seen that many times.

Aleksey:
Like, it’s like, well, like what, what are we doing here? Like, I, it is just, it becomes super hard to trust the counterparty when like the basic facts are I don’t wanna say being lied about, it’s not false that they were involved in those deals, but they’re, they are, they’re like deceptive. You get what I’m saying? And so anytime you see or sniff, so to speak, any level of deception, like I think you just like gotta put the deck down and, and, and probably not look at them again, right? Because it, like it, you will never understand how the counterparty reacts to things. And, and the best smell test is in the beginning, like, how do they present themselves? Are they honest? Once you already invest, things rarely get better. They either stay the same or get worse.

Charles:
Yeah, that makes perfect sense. So there’s different structures out there for people that are doing type of investments that they might see, and they might gloss over some of the stuff when they’re reading through, like you said, a pitch deck. And one of the big differences I’ve seen sometimes is explain like the differences between return on capital for your return of capital structures and how this can impact investors’ returns on that specific deal. Yeah.

Aleksey:
So let’s start on return of capital meaning like the clause in the waterfall that typically comes after the pref, A typical waterfall will go pref first, return of capital second, and then, you know that, that the split between the GP and LP hits. I, I wrote an article that literally says something along the lines of, I think it says, don’t budge on return of capital, something like that. And, and the, basically the, the idea there is if you’re looking at a deal, a real estate deal, a syndication that does not have a return of capital clause in a dock you should just like literally run for the hills because it, it, like, it does, there are exceptions to this, but it’s like 99.9% accurate. In other words, it’s very difficult to make sense of a case where NLP puts up, let’s call it 90 to 95% of the capital, but the profit share is not after that capital is returned.

Aleksey:
Like the, the, the risk reward profile for the LP is so unhealthy at that point that like, it, it’s almost impossible to bring a deal. That would make sense. And so that’s why I take such a hard stance on that. I generally don’t take so many hard stances, by the way. But on, but that, on that particular thing I do. And then the return on capital, as you said, is just like the returns that you’re making, right? Like, which can be measured on like cash, on cash you can measure it through like multiples. Sometimes people look at averages, you know, whatever, whatever you like, what, whatever your preference is. But, but there, I would just remind people that you, you really have to make sure that you’re looking at net returns to the lp. And if any gps are listening, you know, try to make that clear. Like don’t just put IRR clarify whether that’s a, you know, deal level IRR or N-L-P-I-R because there’s a big difference sometimes,

Charles:
Right? Like a net versus a gross kind of to investor. Yeah, yeah,

Aleksey:
Yeah. And by the way, both are fine. I think net is u more useful to an LP to make a decision. But I’m just saying, you know, just be transparent which one you’re showing. Yeah. The other thing

Charles:
I want to, you, you talked about there is when is there, does it make a big difference when you’re reviewing a deal if it’s going to be a levered or unlevered kind of IRR return on that? Or is that not as important to the investor? I guess just knowing how much debt’s in the deal. I think the

Aleksey:
Level of debt is important. I think once you go to like levered versus unlevered, IRRs, you just lose people. Like, you know, the, the most retail LPs are making decisions. I, I just tweeted about this yesterday, like, you know, I, I think we’ve lost it so to speak with like these decks where it’s like, here are your six investment options and each one has like a different fee level and like, if you invest this much, you get, you know, 5% more of the upside. It’s just confusing, man. Like, sometimes I look at these decks myself and I spend like 10 minutes trying to understand something and I still don’t get it. Then I look at the PM and I still don’t get it, and then I, and I reach out to the sponsor and it’s like, if, if I’m having such a hard time, like, listen, I’m not the smartest person, but like, you know, like how, how is someone, you know, between surgeries so to speak, supposed to make a decision when things are so unnecessarily complex? You know what I mean?

Charles:
Yeah. It’s like choosing an insurance policy or something and you’re going through all this stuff. Oh yeah,

Aleksey:
Don’t get me started <laugh>.

Charles:
So talking about presentations, this is one thing that I found a lot and the amount of times I’ve had like you said, ppms, the private place memorandum, the legal documents not matching with actual investment decks. I mean, it’s, it’s pretty numerous. I don’t look anywhere, I don’t look as many anywhere near as many as you do. What are some of the top like, misleading information that you might find common in these investment presentations that people should really take a second glance at when they’re going through ’em? ’cause I think that’s high level what people are really, I think the PPM, not many people are really reading that as in depth, but I think they really spend a lot of time on those pitch deck presentations.

Aleksey:
I think the single biggest surprise is usually fees. And it never, it, it almost never borders on like illegal stuff. Meaning it’s not necessarily that they told you they’re gonna charge 2% acquisition fee and you open up the PPM and it says five. Now have I seen that happen? Yes, but I’m just saying that’s pretty rare because that’s just like, I mean, it’s pretty egregious, right? Now what I have seen is like, I’m gonna call it deceptive behavior, which is the deck, for example, makes it seem like, like acquisition fee, zero asset management fee zero. And then, and then there’s like, I dunno, I’ve seen all types of decks like this, and then it’s like other gps, like 3%, 3%, 2%, and you’re like sitting there as an lp, it’s like, wow, like this is pretty awesome. And then you wire the cash and then one day you open the PPM and you’re like, oh, there was a 10% disposition fee, right? And you’re like, oh, so that’s why you didn’t have any fees. Okay. Now, now here’s where it gets like really nasty is like, what happens if the investment doesn’t perform? They still get the disposition fee, right? That comes out before the waterfall hits, right? So, you know, I don’t make the rules <laugh>, you know what I’m saying? It is just like, I think there’s a level of like transparency that I think generally is missing in the marketplace. And people just have to look out for themselves.

Charles:
So for someone that’s seen a lot of different sponsors and deals out there, and one thing I guess I always hear people really complain about is like reporting and myself as a passive investor on a lot of deals as well, it’s something that I always, not always, but I’m continually asking for additional information from some of the gps that they might not be as detailed on the reporting as possible. For you, I mean, what type of reporting should LPs really be looking forward to receiving, let’s say on a monthly and or on a quarterly basis? What, what do you wanna see from your investments when you’ve when you’ve invested?

Aleksey:
Sure. so anyone who wants like a detailed answer I have an article called minimum Viable Reporting Package. There’s another one by the way called Minimum Viable Capital call, another one called Minimum Viable Deck. You know, like I, I, like, I wrote a whole series on, I guess by my thoughts on a lot of these topics, but in, in terms of reporting package I think my, my simplest guidance is just like, think about what matters to the lp. Okay? And, and like, and be honest with yourself. That’s the hard part, right? Because that’ll just give you an example, like what’s the number one thing that the LP cares about? I think that’s pretty obvious. Like, yeah, like how’s my investment doing right now? What most gps will do is don’t give an answer to that right? Directly. You’ll like go around and suggest you, you’ll suggest

Charles:
You’re moving in the right direction,

Aleksey:
Different topics. Yeah. Yeah. You, you’ll like suggest different topics and hope that the LPs piece

Charles:
It together, like

Aleksey:
Pieces it together and they’re like, wow, things are great.

Charles:
We painted the building, there’s a new roof on it.

Aleksey:
Yeah, exactly. And, and we made a dock park, right? And we did this and we did this, and here’s a picture of the puppies and like our holiday party and like look like all of those are really nice. It’s nice to keep your investors updated. It’s good for investments, it’s good for your new investments, do it, but like, don’t lose track of what actually matters, right? What matters is like what did you promise them in terms of the proforma in year one and how is that going against what happened in year one, right? Like basic stuff, right? How have cap rates changed since I invested in this, like, you know, something traded.

Charles:
Yeah, that makes perfect sense. I guess when I 200 basis points lots, which is great that, I mean, we’re proactive and are going through, I guess all this is just to show moving through the business plan, know it, you just stuff’s going the right direction.

Aleksey:
Maybe I should know about it’s

Charles:
Between, you know, budget and, and again,

Aleksey:
Be clear like these are difficult

Charles:
Topics because it’s

Aleksey:
Deliver

Charles:
Great news. We, I know we’re, we have but harder here.

Aleksey:
I

Charles:
Have two questions left for you before people learn about your company

Aleksey:
Work, but point

Charles:
Is just, and this is one thing that we kind of spoke about a little bit before we running the deal, I think over the last several years would

Aleksey:
Get update every six months

Charles:
Deal operators take on and vertically integrate property management with the firm.

Aleksey:
And

Charles:
By the way, I’m, every time I’ve asked if anybody’s listening to the show for a while, I

Aleksey:
People about the

Charles:
Pros, and I’ve done that and you like

Aleksey:
Occupants, number of you didn’t tell me that you

Charles:
Three months off, I’m also not really adverse to third party management properties when I invested.

Aleksey:
Doesn’t too

Charles:
Much

Aleksey:
More, you paint a certain picture,

Charles:
I guess comfort in knowing that

Aleksey:
They’re

Charles:
Doing versus someone that might have 15,000 units in property management. What is your take on providing firms that are doing their own property management?

Aleksey:
That answer really want sensitive topic, but I’m gonna tell you what I think I think probably in the vast majority of cases, it’s a marketing tactic. In other words, people I EEGs want to tell LPs that we’re vertically integrated and we have a thousand employees or you know, whatever the number is, like something impressive, right? And like look, you know, look at, you know this person on site that I hired him two years ago and he is our maintenance guy, you know, and, and, and so on and so forth. And by the way, it’s very, it’s, it’s it has a real impact. You know, like there’s truth to it. Now if you’re asking me from a pure investment perspective I think the answer’s pretty clear. And if, if the gps are honest about what they know about the economics especially when you’re just getting started, it is extreme, like an extremely bad idea to do internal property management. Like, it, it’s an extremely I’ll, I’ll say it like this, at best, it’s a very inefficient operation. At worst, you’re actually costing LPs money. Like and again, at some point you scale up and it makes sense fine, right? But, but I, I think that for the v vast majority of syndicators, at least like, let’s call it in the first three years, obviously it depends on scale, but it just doesn’t make sense. Yeah. It’s

Charles:
A difficult low margin business. And it’s, it’s difficult to do it right? I self-management properties for six years and it’s it’s a lot of work. It’s a lot of work. It’s a thankless job, but it’s, it’s, that’s why I always, when I see people doing it, I, it doesn’t push me one way or the other, but you have people you talk to and they, oh, I invested in this deal. And and that’s something they throw out there and they’re bullet points to you, you know what I mean? And you kinda gloss over that. But alright. As we’re finishing up here, how can our listeners learn more about you and your business, LP LP lessons?

Aleksey:
Yeah, sure. So I mean, LP lessons.co co is the blog. I think at this, as of this morning, I think it was like 7,500 investors that get my weekly updates. For any of those those that are listening and they are either a GP looking for capital or they’re LPs and they’re looking for deals, I encourage them to go to gp lp match.com, which I just started like a month ago. And it’s basically free service to both sides of the network. And you know, it, it sounds exactly like it’s named, which is, you know, GP submit deals and they match with LPs, LPs get notifications and they reach out to the gp. It’s like pretty simple. And obviously if anyone wants to reach out, I welcome all hellos and it’s pretty easy to find me on LinkedIn and Twitter. Okay.

Charles:
Well thank you so much for coming on today. Looking forward to connecting with you in the near future and we’ll put all the links down in the show notes. So thanks again. Awesome.

Aleksey:
Thank you Man.

Links and Contact Information Mentioned In The Episode:

About Aleksey Chernobelskiy

Aleksey Chernobelskiy advises limited partners (“LPs”) on existing and future investments. He’s also the founder of GP-LP Match, a platform which allows LPs to see deals that match their specific investment criteria right in their inbox immediately after a GP submission. Aleksey writes weekly to 6,000 investors at www.LPlessons.co to explain how to properly vet and think about LP investments in the grand scheme of their portfolios. Aleksey also helps General Partners on matters relating to LPs, such as capital calls or feedback on investment decks.
Prior to advising LPs, Aleksey ran STORE Capital’s $10 billion commercial real estate portfolio and oversaw the firm’s underwriting team. Aleksey graduated from University of Arizona with a quadruple major – Finance, Mathematics, Economics, and Accounting.

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