‘Fake it till you make it’ as the saying goes. In commercial real estate investing, the number of doors is a common metric used during the capital raising process to talk about the experience level an operator has in the business. The theory behind this is if you say that you have “1000 doors”, the investor goes “Wow, this sponsor is super experienced and I want to invest with them.”.
It’s common to see this metric on investment overview decks but it’s often misused and deceiving. Red flags should go up for investors when seeing that metric. Sponsors should be wary of using that metric. Here’s why.
Doors under management do not actually indicate the level of control on an investment. In real estate investments, it's common to hear people call themselves “Co-GPs” on an investment and then use the number of doors as a way to enhance their experience level.
Let's take an example.
A sponsor is purchasing a 300-unit property. The total project price is $20 million. They take a bank loan for $15 million and are raising $5 million. If the lead sponsor cannot raise the capital from their own investor base, they partner with three or four other co-GP’s to raise the capital. These co-GPs likely have a minor role in the project. Yet, they can now market that they have 300 additional doors.
You can see how quickly this number can be inflated. A sponsor could play a minor role in 4 or 5 projects with completely different lead sponsors yet be marketing themselves as a “1000 doors” sponsor. Investors may believe that this sponsor is experienced when in reality they have very limited experience.
For investors, if someone is marketing the number of doors as part of their experience, it should be an instant flashing red signal. Stop and look both ways. The investor should dig deeper into the sponsor’s experience with all the doors.
How many projects does that entail and what is the size of each project? How many are they currently overseeing on a day-to-day basis? How many projects/doors have they exited and what was the success rate? What role did they play in those projects? These questions are critical to really understanding their experience level.
For sponsors that use doors as a metric to sell themselves, be very cautious. You are taking a major risk if you don’t manage and control the doors. If the investment performs poorly and the investor then realizes that you did not control the project, you are subject to litigation and investor fraud. This is not just about losing investor capital. It could result in fines and jail sentences as well.
In summary, the number of doors can be the ultimate artificial metric. Investors should be weary of believing this number and sponsors should be very cautious when using it.
