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Real Estate Syndications: How to Evaluate Sponsors (Part 1)

Apartment Syndication

As a part of our real estate syndication business model, we partner with a select number of other operators to bring a broader range of investment opportunities to investors. This requires spending a considerable amount of time getting to know operators, understanding their philosophies, and analyzing deals. However, before jumping into a partnership or bringing an opportunity to investors, we feel there is a great amount of alignment and analysis on the team to ensure a good fit for us and our investors.

Many of our passive investors are high-income earners, busy professionals, and devoted parents who seek the perks of real estate investing, without the time-constraints and hassles of dealing with tenants, toilets, and trash. These investors work hard for their money and seek quality projects to invest in passively with respected sponsors. We see it as a great responsibility to properly vet value-add deals, mitigate risks, and deliver strong returns.

If you ask seasoned investors of the biggest risk when investing in apartments, most will tell you in order: the sponsor, the market, and then the deal/asset. With that in mind, we’ve created a 3-part series to help passive investors know what we look for and what they should look for when it comes to real estate syndication opportunities. This first installment of the series will focus on the sponsor.

 
 

Real Estate Syndications: How to Vet Sponsors

 

Without a doubt, the sponsor is a critical component when it comes to real estate syndications. And if we’re exploring partnering with another sponsor, we’re looking for the same things a passive investor should be looking for – the sponsor’s track record, team, knowledge/resources, and trustworthiness.

 

Sponsor Track Record

When checking a sponsor’s track record, you want to see success, but don’t get blinded by impressive returns or projections. You want to understand what drove that success and determine if those factors can be replicated for future deals. Make sure you ask them about challenges in their business and a deal that didn’t work out as expected. Pay close attention to their response. Do they point fingers and blame others or do they take accountability and acknowledge what they would do differently?

Experience is important, but there is a reason every investment prospectus includes a warning that “past performance does not guarantee future success.” There are simply too many factors that can vary from previous investments whether they are related to the market, economic climate, personnel, legislation, etc. With that said, it’s the easiest and most tangible element to lean on. Sometimes operators won’t have a long track record in syndications but have strong success in business or a related field with transferrable skills. For instance, I have a marketing background and managed teams on complex, multimillion-dollar projects for over 13 years. At one point, I managed 7 vendor agencies and oversaw a marketing budget in excess of $100 million. Notably, I helped turn around a struggling automotive brand to become the fastest growing brand in America. That experience is extremely relevant when it comes to overseeing key aspects of apartment syndications such as project management, budget management, vendor relations, and investor relations.

 

All-Star Real Estate Team

The operator is the point person and their ability to assemble a remarkable team and oversee the business plan is critical. Besides the operator, other key positions we want to learn about are the property management company, contractor, lender, and any advisors/board members (amongst others). If the operator does not have a lot of experience, we’re leaning more heavily on the team they’ve assembled. We want to know they’ve put together an all-star cast with motivation to see the project succeed.

As our business plan focuses on value-add and making renovations to the property, we pay particular attention to the property management team and contractor. We want to ensure these teams have the ability to execute the business plan and have the appropriate experience for the project. Often times the contractor will not be selected until after closing, but it’s helpful to understand how the operator plans to approach filling these key roles.

 

Assess Their Real Estate Knowledge and Resources

A sponsor should have a strong knowledge of their market, deal structure, risks, financing, and many other facets that can impact operations. They don’t need to be a real-life Alexa or Siri, but they should have considered many of these factors when presenting the opportunity.

In this instance, you’ll want to assess the operator’s knowledge and resourcefulness. What do they love about the deal, what concerns them, and how do they plan to mitigate those risks? Have they consulted with other industry experts and syndicators? Do they have relationships with other syndicators? Where will they turn when something doesn’t go according to plan? Have they navigated issues with property managers, contractors, tenants, and even local government agencies? Ultimately, we want to know that the operator is knowledgeable and resourceful enough to protect our investor’s money.

 

Bonus Clip: How to Evaluate Multifamily Sponsors

How to Evaluate Multifamily Sponsors with Spencer Hilligoss - Episode 204
 
 

Determine If You Trust Them and If They Respect You

The last area we look for is character and trustworthiness. I’m looking to understand who they are and what motivates them. What’s their long-term plan? Are they transparent? Are they prioritizing investor returns over their own profits? It’s important to listen to that gut feeling and ask more questions if something feels off. If I don’t generally like them as a person, I’m not going to do business with them no matter how accomplished they are or what team they’ve assembled. We do business with people we like and because these investments are generally held for 3-7 years, it’s important to like and trust the people you will be investing alongside.

Even more important than “liking” someone is being respected by them. When you have questions, will they take the time to answer them or simply tell you not to worry about it? Many investors working with a new sponsor (especially those considering their first syndication) are cautious and have lots of questions when exploring an investment opportunity. A sponsor should be able to answer these questions and calm any normal trepidations without “selling” investors on a deal.

One question that investors tend to ask is if the sponsor is investing in the deal. This is a fair question, but should not make or break your decision. We like to see the general partners investing alongside limited partners, but it doesn’t all have to come from the lead sponsor. Ultimately, this is another touch point to validate the operator’s commitment to the deal.

Selecting a sponsor to work with is a critical step for any passive investor. This person should be someone who has a track record of success, surround themselves with a successful team, be knowledgeable and resourceful, and be someone you have gotten to know, like, and trust. Once you’ve decided that we want to move forward with the operator, then you can turn your attention to the market and the actual deal.

 

The next article in this series will focus on finding the right market. If you like this article and want to get more multifamily tips and exclusive investment opportunities, join our private list today.

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