Understanding the Role of a Sponsor

The term "sponsor" is synonymous with general partner (GP), syndicator, or lead when it comes to commercial real estate investing. There are various players involved in CRE transactions such as brokers, attorneys, passive investors, etc. but one of the most critical is the sponsor. 

The sponsor is the individual or team that brings a deal to fruition and sees it all the way through it’s completion. Essentially, the sponsor is the quarterback, leading the team and project down the field. 

Historically, the sponsor was typically an individual or a fully integrated company, that was responsible for all aspects of running the deal. However, with the growth of syndication, the number of “sponsors” on a single deal has risen and as a passive investor, it’s very important to understand the roles and responsibilities of each GP. In this article, we cover the main roles of a sponsor at a high-level.

Acquisitions

From a passive investor’s point of view, they are presented a deal once it’s under contract and the equity raise starts. However, the work for the sponsor begins well before getting a deal under contract and includes:

• Building Team: The sponsor develops their criteria, identifies markets, and builds their team which is a long list of members including lenders, attorneys, CPAs, brokers, property managers, etc.
• Underwriting: The sponsor underwrites hundreds of deals and tours many of them before submitting offers to purchase. 
• Contract: Once a deal is identified and awarded to the sponsor (which is a long process in itself), then a legal contract is made and involves significant earnest money, often nonrefundable, put up by the sponsor. 
• Due Diligence: Once under contract, the due diligence begins and involves physical inspections, financial reviews, budget updates, creating entities, opening bank accounts, preparing investor pitch, etc.

Raising Money

From the broker’s and seller’s view, one of the biggest risks in syndications is the fact that the money to purchase the deal has to be raised post contract signing. Syndicators should have a good existing network of investors, be confident that the business plan aligns to their investors goals and be confident they can raise the money. Sponsors prepare investment pitches (via decks, webinars, etc.) to their investors and if done effectively, they are able to raise the equity from passive investors to close the deal. 

Asset, Operations and Construction Management

Once the deal is closed, good operations and asset management is imperative to its success. Many sponsors are vertically integrated, meaning that they have in-house property management, and are able to control (i.e. asset manage) more effectively. However, most syndicators rely on 3rd party management firms and as such, require extremely sound asset management practices to ensure plans are being executed:

• KPI Tracking: Sponsors need to layout the business plan and outline KPIs that are tracked on a daily, weekly and monthly basis and effectively pull levers when things go off track. Good sponsors have a strong pulse of the deal always. 
• Communication: Good asset managers have regular communication with their on-site teams and the best have very strong relationships with them as well. Transparent and frequent communication is key to ensuring bottlenecks are addressed timely.
• Vendor/Contract Management: There are various vendors and contracts involved in running a CRE deal. The sponsors need to have the processes in place to effectively manage and negotiate them. We’ve seen many examples of owners dropping the ball and letting contracts, like laundry service, automatically renew for additional 10 year terms due to poor oversight. 
• Construction Management: Value-add deals have significant capital projects that require strong management skills. Sponsors must develop a plan, oversee GCs, and ensure completion within timeline and budget. Furthermore, there are arduous processes required to get lender draws for rehab dollars held in escrow.
• Financial Analysis: Though the property-level books are prepared by the management company, the sponsors have significant responsibility for ensuring they are accurate, which requires some financial acumen. Management companies are prone to make a lot of errors as they usually manage thousands of units and are spread thin. Further, sponsors need to conduct their own cash-flow analysis, capex spend analysis, distribution analysis, etc. and develop investor reports. 
• Capital Event Preparation: Refinance and sale events need to be planned several months in advance and executed well to ensure maximized proceeds. 

Investor Relations

Investor relations is a very important responsibility as investors have entrusted sponsors with their money and should be in the know on the deal’s progress. 

• Investor Communications: Sponsors should have a regular cadence of communicating with investors. Usually, this involves monthly or quarterly status and financial updates. Further, as major issues arise (e.g. Covid-19), good sponsors get ahead of them and communicate proactively with investors. 
• Administration: Sponsors will have to work with their CPA to provide investor tax K1s yearly. Further, as investors have requests such as changing bank account info, transferring shares to an entity, getting updated SREO info, etc. the sponsors need to have the right processes to effectively manage these requests on a timely basis. 

Summary:

The aforementioned items are just a sample of a sponsor’s role in effectively managing a CRE deal. It should be evident that there are a lot of moving pieces in this business and it requires incredible teamwork and business acumen. It is imperative that passive investors evaluate sponsors, their track records and business philosophies appropriately as not all sponsors are created equally.

Just because someone is a “GP” or sponsor on a deal doesn’t mean that they are managing all the activities above. Investors should understand and feel comfortable with the execution ability of the entire sponsorship team, not just the person that presented the deal. Even with a large amount of sponsors, there is usually a select few that really manage the execution from start to end. Great sponsors run their deals like a business with the right systems, processes and people and make for an exceptional investor experience. Sponsors are critical to a project’s success and investors should spend the time to assess the sponsors before committing to invest. 

About the Author

?Shane Thomas is co-founder of Catalyst Equity Partners, a Texas-based private equity firm focused on helping busy professionals earn double digit returns through investing in apartments. To learn more, visit www.catequity.com and connect with Shane on LinkedIn and Facebook.