A real estate syndication is formed when a sponsor—an individual or company—raises funds from investors to undertake a deal. The right sponsor can make all the difference in a successful venture, leveraging their experience and resources to lower costs and increase profits.
But how does an investor go about evaluating sponsors? Besides referrals and trial by fire, are there factors and characteristics by which to measure a company? RealCrowd co-founder Adam Hooper recently sat down with Paul Kaseburg to discuss these very questions and more.
Kaseburg has spent 17 years in private real estate equity investment and capital markets, specializing in corporate mergers and acquisitions. At MG Properties Group, he has led the purchase of over 12,000 units with $1.7 billion in total consideration. He shares what he’s learned over his many years of working in the trenches.
The Role of a Real Estate Sponsor
Kaseburg reminds us why a sponsor is so important—“A sponsor finds a deal, puts that deal together, raises the equity, arranges the debt, and when the deal closes, takes care of the property and ensures the values are maximized,” he says.
In short, without a sponsor, there is no deal. But sponsors come in many forms, shapes, and sizes, ranging from two guys in a garage to multi-million dollar corporations. The advantage of partnering with larger companies is that they are often vertically integrated.
This means that the sponsor has in-house capabilities, and can leverage those teams—property management, construction, and financing for example—to create efficiencies in operations. “This also tends to bring in some extra fees,” Kaseburg notes. And these fees, which may seem counter-intuitive to an investor who doesn’t want to pay more, may actually help sponsors weather a downturn.
“I mean, I definitely had some colleagues who were at platforms that really didn’t have that fee income coming in, and in a downturn, I saw them shut down. And that was definitely not a good thing for investors,” Kaseburg adds.
Get Focused Before Reaching Out to Sponsors
To make the process of evaluating sponsors easier, Kaseburg suggests being clear on the type of real estate portfolio you want to build. Start with these two questions to get organized: What is my allocation to real estate? And what kind of product does that get me?
Knowing how much capital you have available and your tolerance for risk will help you decide if in fact, private real estate is the right choice or whether a REIT investment is the better option. Deciding on where you want to be in the capital stack—whether it’s common equity, mezzanine debt, preferred equity, or senior debt is something else to consider.
You can then move on to choosing an investment type and asset. Whether you allocate to offices, multi-family, or retail, Kaseburg likes to see an investor get very detailed, such as “I am looking for equity investment in retail in the Western United States,” he says. It is at this point that you can then find sponsors that specialize in your preferred investment.
What to Look for in Your Sponsor
To evaluate integrity, Kaseburg keeps it simple. “There’s good and bad in a normative way, where you’re asking if this person or group will do the right thing for investors? And when there’s a downturn, are they going to treat their investors the way they should be treated? Are they going to act in everyone’s best interest?” he asks.
And then there’s the question of strength. Specifically, does the sponsor have a strong network and liquidity? If the deal experiences a cash shortfall, is the sponsor going to be able to step in and deal with it? Are they going to be able to keep deals solvent in a downturn?
Kaseburg has seen sticky situations where a sponsor may have a personal recourse on a variety of loans, and one of those loans throws them into bankruptcy. For investors, this is frustrating news, given that the deal might be performing fine.
As for the effectiveness of being a sponsor, this relates back to vertical integration discussed earlier. “Once the property is purchased, consider whether a sponsor has a team in-house and the organizational structure to get the job done,” Kaseburg says.
Hard Questions to Ask Your Sponsor
Reputation can affect sponsors and have an impact on future pricing. “Having a bankruptcy on your background, having a foreclosure in your track record, it’s certainly not the end of a career. I mean, we definitely know that is not the case in real estate, but it impacts the pricing that you’re going to get,” Kaseburg says.
He advises investors to sit down and have a conversation with sponsors if possible. “It’s important to know what blemishes a sponsor has on their track record when they’re going forward. And then knowing how a sponsor dealt with a problem on the equity side” he says.
These are a few questions that get to the heart of these issues:
- What were the most difficult deals that you had? And how did they unfold?
- How was that problem resolved with a lender?
- How was that problem resolved with investors?
- And what was the ultimate resolution of the deal?
The reality is, real estate is a dynamic industry and problems do come up. “The best-case scenario is that investors agree that it’s really just a timing issue, and they put in a little more money to get the deal over the hump, and then it does, and things work out okay. And if the sponsor needed to put in a little money themselves to keep things going that’s always a good factor to see in a track record too.” Kaseburg states.
At the end of the day, Kaseburg thinks it’s important to pick a group that you really believe in and spread out your bets amongst different platforms so you don’t have too many eggs in one basket. With the tips provided above, you’ll be well on your way to evaluating sponsors.
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Tyler Stewart is VP of Investor Relations at RealCrowd. All opinions expressed by Tyler and interviewees are solely their own opinions and do not reflect the opinion of RealCrowd. This article is for informational purposes only and should not be relied upon as a basis for investment decisions.