Four Steps to Vetting the Sponsor

[Jorge Abreu]

✨Without a doubt, the sponsor is a critical component when it comes to real estate syndications. And if we’re exploring partnering with another sponsor, we’re looking for the same things a passive investor should be looking for - the sponsor’s track record, team, knowledge/resources, and trustworthiness.

The sponsor is responsible for many aspects of what goes into a good real estate deal.

• Finds and sources deals

• Negotiate to put the deal under contract

• Does the due diligence on the property

• Puts together all the capital and financing

• Develops and executes a business plan

• Communicates with investors

• Oversees the operation and management of the asset

• Provides updates and financial reports

• Decides how and when the property will be sold

• Makes sure investors get paid

Step 1: Check the Track Record

When checking a sponsor’s track record, you want to see success, but don’t get blinded by impressive returns or projections. You want to understand what drove that success and determine if those factors can be replicated for future deals. Make sure you ask them about challenges in their business and to share with you a deal that didn’t work out as expected. Pay close attention to their response. Do they point fingers and blame others or do they take accountability and acknowledge what they would do differently?

Experience is important, but there is a reason every investment prospective includes a warning that “past performance does not guarantee future success.” There are simply too many factors that can vary from previous investments whether they are related to the market, economic climate, personnel, legislation, etc. With that said, it’s the easiest and most tangible element to lean on. Sometimes operators won’t have a long track record in syndications but have strong success in business or a related field with transferrable skills. Is that experience relevant when it comes to overseeing key aspects of apartment syndications such as project management, budget management, vendor relations and investor relations.

Step 2: Look for an All-Star Team

The sponsor/operator is the point person and their ability to assemble a remarkable team and oversee the business plan is critical. Besides the operator, other key positions we want to learn about are the property management company, contractors, lender, and any advisors/board members (amongst others). If the operator does not have a lot of experience, we’re leaning more heavily on the team they’ve assembled. We want to know they’ve put together an all-star cast with motivation to see the project succeed.

If the business plan focuses on value-add and making renovations to the property, you want to pay particular attention to the property management team and contractor. We want to ensure these teams have the ability to execute the business plan and have the appropriate experience for the project. Often times the contractor will not be selected until after closing, but it’s helpful to understand how the operator plans to approach filling these key roles.

Step 3: Assess Their Knowledge and Resources

A sponsor should have a strong knowledge of their market, deal structure, risks, financing and many other facets that can impact operations.

You’ll want to assess the operator’s knowledge and resourcefulness. What do they love about the deal, what concerns them and how do they plan to mitigate those risks? Have they consulted with other industry experts and syndicators? Do they have relationships with other syndicators? Where will they turn when something doesn’t go according to plan? Have they navigated issues with property managers, contractors, tenants, and even local government agencies? Ultimately, you want to know that the operator is knowledgeable and resourceful enough to protect your money.

Step 4: Determine If You Trust Them & If They Respect You

The last area we look for is character and trustworthiness. I’m looking to understand who they are and what motivates them. What’s their long-term plan? Are they transparent? Are they prioritizing investor returns over their own profits? It’s important to listen to that gut feeling and ask more questions if something feels off. If you don’t generally like them as a person, your not going to want to do business with them no matter how accomplished they are or what team they’ve assembled. You should only do business with people you like and because these investments are generally held for 3-7 years, it’s important to like and trust the people you will be investing alongside.

Even more important than “liking” someone is being respected by them. When you have questions, will they take the time to answer them or simply tell you not to worry about it? Many investors working with a new sponsor (especially those considering their first syndication) are cautious and have lots of questions when exploring an investment opportunity. A sponsor should be able to answer these questions and calm any normal trepidation without “selling” investors on a deal.

One question that investors tend to ask is if the sponsor is investing in the deal. This is a fair question, but should not make or break your decision. We like to see the general partners investing alongside limited partners, but it doesn’t all have to come from the lead sponsor. Ultimately, this is another touch point to validate the operator’s commitment to the deal.

Selecting a sponsor to work with is a critical step for any passive investor. This person should be someone who has a track record of success, surrounded themselves with a successful team, knowledgeable and resourceful, and someone you have gotten to know, like and trust. Once you’ve decided that you want to move forward with the operator, you can turn your attention to the market and the actual deal.

👉Next: Questions You Should Ask The Sponsor

[Evan Polaski]

@Jorge Abreu, this is a good starting list.  My thought, too, is talk to a lot of sponsors when starting out.  It is hard to compare track records when you only have 1 or 2 groups you have seen.

Regarding track record, I agree that market forces can greatly effect returns.  And that is where probing questions about how they are underwriting today versus a year ago versus three years ago comes into play.  I do take issue with a lot of people with no real estate experience jumping into syndications.  Of course having success in another industry helps, but there is a huge difference between being promoted within a fortune 500 company and understanding the risks of a multifamily project.  Experience in real estate for new operators is very high on my list of requisites.

As for you sponsors investing in a deal, I disagree with where the co-investment comes from.  It should come from every GP, but particularly the lead sponsor.  As you note, the lead sponsor is bringing the deal, setting the business plan, and overseeing the operations.  If they can't put a financially significant amount of equity in the deal, it would greatly reduce my trust in them as an operator.  As noted, this should be financially significant to that individual.  A person just starting as a GP may not be able to put $1mm into a deal, but if they can't put $50k or more into a deal, this raises a lot of red flags, including their own ability to keep a personal budget and save for a rainy day.

But assuming the sponsors do co-invest in the deals: my next question is do the employees in the company invest in the deals.  This, of course, implies that there are other employees.  But to me, if the non-partner employees are investing in the offering, that builds a lot of trust in the operator.