LP Due Diligence Checklist: 47 Questions Before You Wire

1

Sponsor Background

10 questions

1

How many deals have you fully exited, and what was the net IRR and equity multiple to LPs on each?

Request a deal-level schedule, not an aggregate average. Every realized deal should appear, including underperformers.
2

What is the tenure of your key team members, and have any principals departed in the past three years?

Team continuity is a material factor. Departures may indicate internal disagreements about strategy, compensation disputes, or underperformance-related friction.
3

What is your co-invest in this deal, expressed as a dollar amount, and what form does it take?

Cash at close, in the same tranche as LP capital, is meaningful alignment. Promote-funded or deferred co-invest is not equivalent. Ask to see the source-of-funds for the co-invest.
4

Can you provide references from LPs who are currently invested in active deals that have experienced at least one distribution cycle?

References from exited deals tell you about the past. References from active investors tell you about current communication quality and whether distributions are on schedule.
5

Have you ever missed a preferred return payment, suspended distributions, or issued a capital call beyond the original offering?

The answer is not automatically disqualifying. The explanation and outcome are what matter. Evasion is a red flag.
6

Have you or any principal been the subject of an SEC, FINRA, or securities regulatory enforcement action or investor complaint?

Searchable through EDGAR, FINRA BrokerCheck, and provincial securities commission databases. Verify independently.
7

What is your current total assets under management, how many active deals are in your portfolio, and what is their aggregate current occupancy?

A sponsor managing 12 active deals simultaneously has a different management bandwidth than one managing 3. Current occupancy is the leading indicator of portfolio health.
8

How did your portfolio perform during the 2020 to 2022 period, and do any of those assets have near-term debt maturities?

Assets originated 2020 to 2022 at low rates face refinancing into a materially different environment. Sponsors managing those transitions successfully have demonstrated stress management capability.
9

What is your institutional lender relationship? Do you use agency debt, CMBS, life company debt, or primarily bridge lenders?

Institutional lenders impose underwriting discipline. Bridge lenders provide flexibility but at higher cost and with more covenant risk. The answer reflects sponsor deal quality and relationships.
10

What has been your largest loss on a realized deal, what happened, and what did you change as a result?

Sponsors who have never had a difficult deal are either early in their career or not telling you the full story. The response to a loss is more informative than the fact of it.

2

Deal Fundamentals

8 questions

11

What is the current submarket vacancy rate in the specific unit size and price range for this asset?

Compare to the vacancy assumption in the underwriting. A 2-percentage-point difference in vacancy assumption creates material NOI divergence compounded over a 5-year hold.
12

What is the acquisition basis per unit relative to current replacement cost per unit?

A below-replacement-cost basis provides structural protection against new supply competition. An above-replacement-cost acquisition requires a specific demand thesis to justify the premium.
13

What are two or three comparable sales in this submarket in the past 12 months, and what cap rates did they trade at?

The sponsor should know these. If they cannot cite specific comparables, their market knowledge and pricing confidence is limited. Verify independently if possible.
14

What is the current in-place rent versus market rent for vacant units, and what is the basis for the projected rent growth assumption?

The in-place to market spread drives near-term revenue upside. The growth assumption beyond that needs a supply/demand or wage-growth justification, not just trend extrapolation.
15

What is the supply pipeline for new units in this submarket over the hold period, and what is the projected absorption rate?

New supply is the primary risk to rent growth assumptions. Units under construction or in permitting review are disclosed in most municipal planning portals.
16

What is the physical condition of the asset, and what deferred maintenance has been identified in the property condition assessment?

A third-party PCA is standard on acquisitions. Review the immediate repair cost estimate and the 12-month and 5-year capital expenditure projections. Confirm these are in the project budget.
17

What is the exit cap rate assumption, and what is the current market cap rate for comparable stabilized assets?

Ask for the sensitivity: what is the LP return at exit cap flat and at plus 75 basis points above the base case? The answer reveals how much of the projected IRR depends on cap rate assumptions.
18

What is the primary risk to this deal's return thesis, and what is the probability-weighted downside scenario?

A sponsor who cannot articulate the primary risk clearly has not stress-tested their own underwriting. The answer should be specific: not "macro conditions" but a defined scenario with a corresponding return outcome.

3

Capital Structure

8 questions

19

What is the total loan-to-cost, and what percentage of total cost sits above LP common equity in priority?

The combined senior debt plus preferred equity as a percentage of total cost is the cushion above LP capital. At 80% combined leverage, a 20% decline in asset value from acquisition cost eliminates LP equity entirely.
20

What are the key terms on the senior debt: fixed or floating rate, recourse or non-recourse, maturity date, and extension options?

A floating rate loan maturing before the projected hold end requires a refinancing event during the hold. Understand the conditions required for a successful extension or refinance.
21

Is the LP preferred return cumulative? Does it accrue from capital call date or commitment date?

Cumulative means unpaid preferred return carries forward and must be satisfied before any profit split. Accrual from commitment versus draw date affects both the total preferred amount and the IRR calculation timing.
22

At what point in the waterfall does the GP promote begin: after LP pref only, or after full return of LP capital plus LP pref?

The latter is the LP-protective structure. If the GP promote begins before full return of LP capital, the sponsor participates in profits before you are made whole.
23

What is the total fee load to LPs expressed as a percentage of contributed equity, including acquisition, management, and disposition fees?

Sum all fees over the projected hold period. Divide by total LP equity. This is the headwind against your gross return before you approach the preferred return threshold.
24

Is there a preferred equity or mezzanine layer above LP common equity, and what are its terms and repayment priority?

Preferred equity sitting above LP common equity is paid before LP distributions. Understand the accrued balance at project maturity and how it affects LP net proceeds at exit.
25

Are there any other fees, interest payments, or related-party transactions that reduce LP net returns, including property management fees paid to a sponsor affiliate?

Property management fees paid to a sponsor-controlled entity are a common source of undisclosed fee extraction. Market rate for third-party management is typically 4 to 6 percent of effective gross income for residential assets.
26

What happens to LP distributions if the asset underperforms and falls below the debt service coverage ratio threshold required by the lender?

Most loan agreements require distributions to be suspended if DSCR falls below 1.20x or 1.25x. Understand the trigger, the cure mechanism, and what LP rights apply during a cash sweep period.

4

Legal and Compliance

7 questions

27

Is the offering registered under Regulation D or another exemption, and have all required filings been made with the SEC or applicable securities regulators?

Verify via EDGAR for Reg D Form D filings. Missing or late filings can indicate disorganized compliance, which correlates with other operational issues.
28

Does the PPM accurately disclose all fees, conflicts of interest, related-party transactions, and the complete waterfall mechanics?

Read the risk factors and conflicts of interest sections of the PPM in full. Disclosures buried in footnotes or listed in generic risk factor language are not the same as plain-language disclosure.
29

Does the operating agreement include a key-man clause, and what are the LP rights if it is triggered?

Key-man provisions typically require LP vote on continuance if a named principal becomes unable to perform. Absence of this clause is negotiable before subscription. It is not negotiable after.
30

What are the LP removal rights if the sponsor materially breaches the operating agreement?

Some operating agreements provide LP rights to remove the GP for cause with a supermajority vote. Others provide no such right. Understand your remedies before you are in a situation that requires them.
31

Do LPs have audit rights, and can you request audited financial statements for the entity holding the property?

Institutional LP agreements almost always include audit rights. If the operating agreement does not, request an amendment. You should be able to verify financial statements independently.
32

What is the subscription agreement's representation and warranty language regarding accredited investor status, and are there any restrictions on secondary transfer?

LP interests in private placements are generally illiquid and non-transferable without GP consent. Understand your exit options beyond a full asset sale. Most LP interests have no liquid secondary market.
33

Has your attorney reviewed the PPM and operating agreement, and are there any provisions that are non-standard or LP-adverse that you should know about?

This is a self-directed question. If you have not engaged independent counsel to review the legal documents, you are relying entirely on the sponsor's counsel, who represents the sponsor's interests.

5

Financial Projections

8 questions

34

Is the projected IRR gross or net of all fees and the GP promote?

Gross and net IRR can differ by 2 to 4 percentage points on a typical deal with standard fee structures. Always confirm which figure is being used in marketing materials.
35

Can you provide the underwriting model in Excel so I can review the cash flow assumptions and run my own sensitivities?

Sponsors confident in their underwriting will share the model. Sponsors who decline to share it are limiting your ability to independently verify the projected returns.
36

What is the LP return at exit cap rates 50 and 100 basis points above your base case assumption?

This question isolates cap rate risk, which is the largest single driver of terminal value. A deal that requires cap rate compression to generate the projected return has a different risk profile than one that achieves its return at current market cap rates.
37

What is the break-even occupancy required to service the debt and meet LP preferred return, and how does it compare to current occupancy?

The cushion between current occupancy and break-even is a measure of downside protection. A property currently at 87% occupancy with a 78% debt service break-even has meaningful cushion. A property at 92% with a 90% break-even does not.
38

What revenue assumptions underlie the rent growth projection, and are they consistent with trailing 24-month market data for this specific submarket?

Ask for the specific data source. Submarket-level rent growth data is available from CoStar, Yardi, and RealPage for major markets. Generic metro-level statistics are insufficient.
39

What is the debt service stress test at the current rate plus 150 basis points, and what is the impact on LP distributions?

Relevant for floating rate debt or any deal with a near-term refinancing event. The debt service coverage ratio at stressed rates determines whether distributions can be maintained or must be suspended.
40

What capital reserve is budgeted for the hold period, and is it adequate relative to the property condition assessment's 5-year capital expenditure estimate?

Underfunded capital reserves are a common source of LP dilution. An unexpected roof replacement or HVAC system failure not in the budget requires either a distribution suspension or a supplemental equity call.
41

What is the projected LP equity multiple in the downside scenario, defined as occupancy 500 basis points below base case and exit cap 75 basis points above base case?

A deal where the downside scenario still returns LP capital represents genuine structural protection. A deal where the downside scenario involves LP capital impairment requires a higher base case return to justify the risk.

6

Communication and Reporting

6 questions

42

What is the reporting frequency, and what specific metrics are included in each report?

Minimum standard: quarterly financials (P&L and balance sheet), occupancy, debt service coverage, distribution per unit, and variance versus original underwriting. Annual audited statements should be delivered within 120 days of year-end.
43

Is there an investor portal, and does it provide real-time access to financial statements, K-1s, and distribution history?

Portal access does not guarantee data quality. Ask to see a sample investor statement before subscribing to evaluate whether the information provided is sufficient for your monitoring needs.
44

How do you communicate when a deal is underperforming relative to the original projections?

Proactive, specific communication about underperformance is the single clearest indicator of sponsor integrity. Sponsors who delay or generalize material adverse information create information asymmetry that disadvantages LPs.
45

Does the operating agreement include a key-man provision that requires LP notification and vote if a named principal reduces their involvement below a defined threshold?

This duplicates question 29 with a different focus: not whether the clause exists, but what the specific trigger threshold is. A key-man clause triggered only by death or permanent disability is less protective than one triggered by material reduction in time commitment.
46

What are LP rights if the sponsor wishes to sell the property at a price or time that the majority of LPs oppose?

Most LP operating agreements give the sponsor broad discretion over the disposition decision. Understanding what triggers LP consent rights, if any, is material if your investment horizon differs from the sponsor's intended hold period.
47

Do LP investors have a formal advisory committee with defined rights, and if so, what decisions require advisory committee approval?

An LP advisory committee with real approval rights over material decisions (refinancing, capital expenditure above a threshold, extension of the hold period) provides governance protection that an individual LP cannot negotiate alone. Its presence indicates a sponsor with institutional-grade governance.