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Aspects for Evaluating a Sponsor
By Adam Gower Ph.D.
Investing in an average real estate deal with a great sponsor instead of a great real estate deal with an average sponsor can be a wise investment decision.
As the sponsor has such an impact on the trajectory of how the real estate is going to perform here are several criteria an investor may wish to consider.
Track Record
The first consideration is track record.
A sponsor should have been around the block a few times and the deal being considered should not be their first transaction.
Indeed, it could be a red flag if a sponsor has only completed two or three deals, and certainly of concern if they have not yet had a successful exit.
Of course, there are exceptions.Â
When looking at the background and bios of the sponsor company’s principals.
If they came from a big operator or a private equity group and there's a spinoff story where they had tremendous experience working at a company and then started their own company, this may warrant greater confidence.
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Cycle Experience
Economic cycle experience is also an important factor.
Having experience during all four phases of the economic cycles is important, rather than solely during the inflationary growth stages.
That said, while it is generally preferable to work with sponsors whose track records extend successfully through at least one major downturn, sponsors also face challenges during bull markets.
While asking multi-cycle sponsors how they managed economic downturns can be informative, for sponsors with only bull market experience a good question to ask is what they have failed on and what have they learned from that failure.
One example of this commonly seen is in multi-family property market where the sponsor hires a property management company.
In many cases management companies will perform to expectations, but sometimes they may be unable to keep to the business plan the sponsor set out to accomplish. Â
If a sponsor has gone in and had to change out a property management company while keeping their tenants happy, that could be a good indicator that they have faced challenges that they’ve managed to handle and be indicative of their ability to handle them in the future.
It’s also worth considering what kind of work went into generating value.Â
If a sponsor only has a successful track record of buying completely stabilized property that have appreciated in value riding macro market trends where they didn't have much to do, that could be cause for concern.
Geography
Geographical expertise is also a factor.
It's important that if a sponsor is buying a property in a particular city to make sure that their track record is that they have owned and/or exited in that same city previously.
While it’s not impossible for a New York based sponsor to do a deal in Los Angeles, it’s going to be more difficult than if they were based in Los Angeles.
Technology has improved to make it easier to overcome the challenges of being a remote owner, but it's still going to be a hurdle a sponsor must clear, and one the investor should watch for.
Lender Experience
Sometimes sponsors can run out of money.
They may run out because the bank is not releasing draws for some reason, or perhaps the sponsor goes over budget and needs additional cash that they did not account for.
This kind of situation can lead to disaster and a seasoned sponsor will know how to go through the process of working with the lender and be able to demonstrate that if something were to go wrong they would know how to handle it and be able to communicate with the lender to make sure their issues are resolved.
Consider also the caliber of the lender a sponsor chooses.
It is easy to be focused on debt terms like interest rate and construction financing terms but checking the credibility of a lender is important too.
Some lenders have a reputation for lax underwriting.
Some have reputations for being excessively bureaucratic to work with.
Talking with a sponsor to hear their insights and of the relationship with their lender can be helpful.
Furthermore, hearing a sponsor talk about their experiences with lenders will provide insight to the sponsors’ track record and sophistication.
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Conclusion
These are only a few of the many aspects of evaluating a sponsor.Â
Before considering investing be sure to read, watch, and listen to everything the sponsor has put out into the public domain.Â
This could include their website, social media, and any real estate crowdfunding site they may have utilized for syndication.
This corpus of information will describe the background and experience, as well as investment philosophy, providing a foundation upon which evaluation of a sponsor can be built.
POSTED BY
ADAM GOWER PH.D.
Adam Gower is a 30+ year veteran real estate investment and finance professional. He expands investor networks for real estate developers by implementing best-of-class digital marketing programs. Dr. Gower has written several books, the latest, Leaders of the Crowd, chronicles the legislative origins of crowdfunding and how real estate came to dominate the industry.
Dr. Gower is host of the podcast series 'The Real Estate Crowdfunding Show, Syndication in the Digital Age' where he talks to pre-eminent experts in digital marketing and social media so syndicators can learn best practices for raising capital online.
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