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Is Ignorance Bliss in Investor Reporting?
April 12, 2022
Ignorance is bliss – or is it? Many sponsors and investors emphasize the importance of transparency regarding operations and investment performance. However, I’ve noticed circumstances where transparency has led to investor frustration, yet most investors claim to want to hear bad news twice as fast as good news.
Based on Kent’s and my personality, we feel most comfortable providing honest asset reporting which includes the good and the bad as well as clear data highlighting actual performance versus budget / underwriting. Many investors greatly appreciate this level of detail and feel more comfortable about the security of their investment. However, in some cases, investors are put off by challenges reported to them especially if they are used to perfunctory reporting with rosy interpretations. Additionally, there may be short term challenges which are to be expected in a typical value-add plan or especially in a turnaround business plan. To less experienced investors, these short-term challenges could be viewed as serious issues and cause them to doubt the investment itself. In reality, all deals have minor bumps in the road on the way to maximizing value.
This is a big reason why it is often necessary to partner with experienced investors when pursuing a deal with little to no cash flow in the first year. It takes a great deal of patience to see a real estate business plan through, and many times, projects come in late and overbudget. Because of this, we report our business plan’s capital expenditures progress each quarter and measure the amount spent/complete for each major project relative to the underwriting budget. A critical component of any reporting is the comparison of actual performance versus budget and supporting commentary explaining large variances.
Regardless of the deal type, I believe providing detailed and transparent reporting is the best way to provide comfort for investors over the long run. In the short term, there may be minor hiccups reported which may unsettle investors, but in the long run investors will appreciate the “more is more” approach. We recently experienced this in our portfolio where we just brought a property up from 75% occupancy up to 90%. Along the way, I’m sure many investors were nervous as this didn’t happen overnight, but by providing the play-by-play through monthly and quarterly communications, we gained strong confidence from our investors in our ability to identify and execute on difficult opportunities.
In other news, we are doing a complete rebuild of our website and are extremely excited to share that with you next month. Additionally, we will be coming out with an eBook, The Passive Investor’s Guide to Real Estate Syndications along with my second full book, Structuring and Raising Debt and Equity for Real Estate. This new book will be an excellent complement to my first, The Definitive Guide to Underwriting Multifamily Acquisitions, which has sold nearly 5,000 copies.