Why do you care about using a sponsor? Investing in multifamily via a sponsor or syndicate is a great way to leverage the experience and time of the sponsor in exchange for your capital and some of your return. By getting good at performing due diligence on a sponsor you can better assess alignment with your interests and improve your chances of hitting your investment goals. Sounds easy? Well it is, but you want to make sure you have the right sponsor!
So, how do you evaluate a sponsor? I’ve outlined evaluation steps below designed to give you the tools and context that you need to evaluate any sponsor. I’ve broken down the process into: 1) initial screening questions to decide whether or not further due diligence is worthwhile, and 2) detailed screening that involves a combination of both quantitative and qualitative criteria. Are you ready?
Initial Screening Criteria
There are so many different real estate niches out there, never mind all of the different markets available. When we evaluate a sponsor, we look for depth of experience in the asset class that we are interested and in the market in which we want to invest. We definitely don’t want to invest with a sponsor on a multifamily deal in Florida when all of their previous deals have been mobile home parks in Alaska.
We look for years of experience, both in total and specific to the investment in question. Whilst we have invested with newer sponsors in the past we do want to size our investment accordingly and we also look for a fee structure that reflects the level of experience in question.
The best alignment on a deal, in our opinion, is co-investment from the sponsor on any deal. We will not invest in a deal if a sponsor is not also co-investing some of their own capital alongside us
Detailed Screening Criteria
Syndicators often charge a whole host of fees – acquisition fees, management fees, construction fees, refinancing fees, disposition fees, you name it. It is important to get detailed insight into what all of the fees are and the sponsor should be able to detail clearly what value they bring for the fee.
2) Track record
Beyond the initial screening question of years of experience it can be helpful to understand how many deals the sponsor has completed, high/median/low exit returns of deals completed with outsiders funds, the total asset value of the sponsors investments, the number of times they have issued capital calls, typical investment %.
Unlike a stock where you can check the stock price every minute, a syndicated real estate deal does not have the same level of real time insight into performance. Sponsors that are prepared to send status updates monthly, provide quarterly financials and give ad-hoc updates on anything that can impact the value of your investment are indicating that they better understand your needs as an investor and are therefore more desirable. If a potential sponsor cannot articulate a clear communication strategy, they likely don’t have one and this is a strong signal of how important you, the investor, are to them after they receive your money
Multifamily syndicated deals are complex transactions and require many specialists in order to succeed. By understanding the team members of the syndicate you can get further insight into and key person risks, their relative experience and alignment with the investment in question. One thing that we always look for is independent, third party management
5) Trust your gut
Meeting the sponsor face to face can be very helpful in terms of deciding whether or not this is someone that you can trust. While it’s not foolproof, it can be a helpful validation step, it indicates that you are taking the evaluation process seriously and allows you to build a stronger relationship.
6) References / Reviews
Ask for references and call them directly, look for reviews on BiggerPockets or other credible real estate resources, and use this information to cross reference what you have received directly from the sponsor as a further validation check.
If you cover the areas above you will be much better positioned to pick a sponsor who meets your specific needs. Always feel entitled to ask whatever questions you like and look for a sponsor who demonstrates a willingness to listen and comprehensively answer any question you have.
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