Real estate success is all about investing at the right time. But for some people handling the investment is not possible. Different strategies and methods can be used to make the investment without difficulty.
For instance, having successful investing, foreign players are involved in the transaction like brokers, passive investors, attorneys, etc. But it is the sponsor who is the most critical.
If interested in the CRE industry, you need to have a proper idea about the players involved in making the project successful. The job role of the sponsor is vital for leading towards success.
The sponsor is the one who involves an individual. He is responsible for bringing investment to positive results and completing it in the best way possible. Essentially, the sponsor leads the team and the project to completion.
The term sponsor is quite broad. It is his responsibility that makes him work hard. This assures the investment stays strong and the investor can get good returns. The guide here will break down information about the job role or responsible and other essentials to help you get a fair idea.
Understanding real estate sponsor role
A sponsor is a person who is well versed in the CRE industry. They are responsible for handling the project. They are generally referred to as general partners by other investors, also known as limited partners.
The limited partners are not responsible for the passive role in the project. Thus, they are known as silent partners. Also, they have limited liability meaning the potential loss in any unexpected situation is limited to the investment amount.
The limited partners trust a sponsor, which is pretty evident why he has a significant role and responsibility throughout the project’s life cycle. The role of the sponsor starts quite early before the investors know a potential deal exists. The sponsor is the one who finds the value either off or on the market. They then negotiate the purchase and sale agreement terms.
Also, they are responsible for preparing the investor, marketing materials, and bringing together all the debt, financing equity capital, etc., required for acquiring the property. The sponsor is also responsible for overseeing the acquisition activities.
As all of the work that goes into underwriting, evaluating, and preparing the deal for acquisition is done by the sponsor, he charges an acquisition fee for covering the related costs. Once the investment is made successfully, the sponsor oversees the management and operation of the property, including the planned renovations, maintenance, and leasing.
Based on the property size, the sponsor can hire a third-party property manager to handle the day to management. But the sponsor will still be responsible for overseeing the entire process to guarantee the object of the deal is met. So, in the end, he takes care of it all.
Further, the project sponsor is responsible for the financial reporting throughout the life cycle, which is usually shared through quarterly letters. They will submit a draft on request through the letters and then make any required payments to the investors.
In addition, based on the opening agreement, he will engage the accountants in preparing and distributing the K-1s. Lastly, the sponsor is also responsible for acquiring deposition and advanced nursing of the property at the investment period’s end.
Making money as an investor
As a sponsor, one can get a lot of benefits in the industry. They are the ones who can make good money with simple management of the project. The sponsors can look for different options to earn money. First, they will take the acquisition fee for conducting and lining up all the necessary research and due diligence on a transaction.
Most sponsors choose to make the direct investment just like the limited partners but not to the extent they do. The sponsors generally bring 5 to 10% of the equity. It is beneficial for the sponsor to get at least 5% of the equity in the total investment to ensure they have a liquid involved in the game. This helps align the interest and assures that the sponsor is responsible for the investment.
At the same time, the limited partners provide the remainder of the equity capital. The entire capitalization of the project is the sum of general partner equity along with bank debt and the limited partner’s equity.
Another way to align the sponsor and the investor’s incentives is to use a structure with a preferred return. In simple terms, an investor is entitled to receive the total return of the investment capital and additional above a sure trash hold.
Herein above, the preferred return will mean that sponsor is entitled to receive a certain percentage of the total gains. You can consider it as up performance fees. They are the only ones allowed to pay these fees if the project performs above the specific expected goal.
Lastly, most of the sponsors also choose to go for annual asset management fees that come with the management of the project. Again, the investment documents will clearly describe the costs to be paid to the sponsor. As an investor, it is vital to pay attention to this and only then make that decision about selecting a sponsor.
Evaluating a sponsor
The job of the sponsor in the project is quite vital. It is thus evident that the sponsor needs to be qualified enough for the job. He is the one who brings specific expertise. Therefore, one needs to feel confident that the sponsor has a good reputation in the market, a strong track record and equity relationships, and other qualities.
In addition, there are specific skills required for managing the project. Sponsors can never be equal. Thus you can consider the tips listed here to choose the best one.
- Enquiring about the sponsor’s experience in the asset class and the local market is extremely important. But, it will be helpful if someone has worked in the office or retail properties and has proper insights into the market or the investment.
- You need to enquire about any of the previous investment projects the sponsor has failed to meet the expectations. Remember to be clear about this and ask the sponsor to elaborate. A sponsor who has been in a business to multiple real estate cycles might have seen some blemishes. But is essential to understand what happened and the course of action after that. You will want to know that the sponsor is committed to providing his time and then inform the investors correctly and precisely.
- It is vital to see if the sponsor is capable enough to carry some risk. You will want a sponsor who is honest about the dangers of the project and help you understand the plans that will help mitigate those risks in the life cycle. An experienced professional will maintain complete transparency with you about the impact of the projects and what steps can be taken to minimize the downside.
- You will want to enquire about how the sponsor lines the equity investment. For example, regarding the debt, the sponsor might use a debt broker or relationship with a particular Bank. Enquiring about it all will help you set proper expectations. Also, you need to see if they can source a better rate than the market by benefiting from the relationship with the banks.
- One needs to evaluate multiple things about the investment. For instance, financing, renovation, stabilization, leasing, everything needs to be understood right from the start. You need to ensure that sponsor is very deliberate and he will be managing the project. Also, he needs to have an excellent approach to the creation and execution of risk plans and understand what will be the right step during an unexpected situation.
Sponsor is the most critical factor in a real estate project’s success. Thus it is vital to work with someone who is qualified and has a good track record. In addition, when investing in the CRE, ensure you find someone reliable who can execute the business plan in the best way possible.
The job of the sponsor is quite vital in CRE. Thus, you must take care of all the measures on time and avoid complications. If you need help finding a sponsor or want someone to help you with your investment, then you can consider contacting Private Capital Investors. They are the industry leaders.
With the best professionals in town, they can assure you have an easy time getting the best services. The professionals have been handling the job for years. They will give you a hassle-free experience of investing in the real estate industry and bringing good returns.