• Eric Wang

How to Evaluate a Real Estate Sponsor

Investing with an experienced real estate operator is one of the most rewarding ways to enter the world of real estate investing. You can rely on the expertise of an experienced real estate professional to carry out the business plan of a project, while watching your savings grow through passive income and appreciation. And today, there is even more access in the market by allowing you to use funds from a self-directed IRA for tax savings.


The role of a real estate sponsor is to manage and ensure the success of a deal. They are are a developer, and they are your partner. It’s important to understand that there is a wide range of personalities and each sponsor has their own approach to investing. Their decisions on which markets to enter, how to manage a rehabilitation, how to structure a capital stack and partnership, and exit strategy vary widely, and you should know their thoughts behind each of these decisions. 

When searching for a real estate manager…


Consider these tactics that will help you carefully analyze which sponsors are the right partner for you.


1. In It Together


As you consider the capital stack and the equity required, find out the general partner’s contributions. Does your sponsor have their own personal funds in the deal? If they are using another entity to co-invest beside you, who ultimately owns that entity? If the manager truly believes in the projected returns, they will have “skin in the game”. Why wouldn’t the sponsor be willing to take on the same risk as her investors? 


At Rev Projects, we always invest alongside our partners, because when our investors succeed, we succeed. We believe in each and every project because of our expertise and years of institutional experience in the commercial real estate industry. By contributing our own capital, we are willing to take the risk and celebrate the same successes with our investors. 


2. Track Record


Understanding a potential sponsor’s track record is crucial. Reliable sponsors will often be willing to provide a schedule or table with this information and should openly detail their past successes or shortcomings. Sophisticated sponsors should be able to identify and disclose the specific variables that made past deals turn out the way they did. 


In particular, you should directly ask them whether they have ever lost investors’ money. Now realistically, almost every experienced real estate developer with a long enough track record has lost money. So losing money is not a deal-breaker, but dig further into the specific circumstances or mistakes they might have made that resulted in the loss. Lastly there are a few other questions to show your caution: Are the stated returns net before or after fees? Can they provide calculations and schedules that backup the stated returns? Can they provide an investor reference who can corroborate the stated returns? Have any investments been omitted from the track record?


3. Sensible Assumptions


There are numerous lines of expenses and income sources on models, but it’s imperative to study their accuracy. Be wary of any line-items that seem overly ambitious when compared to market values. For instance, what is the difference in their projected cap rate compared to the current market cap rate and what is the reason for the delta? Are operating expenses realistically forecasted and can they provide historical operating expense numbers?


Perhaps the manager believes she can execute the best value-add renovation or intuitively foresee strong potential in a particular aspect of the asset. Questioning the competitive advantages that a sponsor promotes is a good way to identify if they are rational investors. 


Like with any other type of asset, a down market may come unexpectedly, leading to less than favorable outcomes for investors. That’s why it’s helpful to also question managers for scenario modeling of upside or downside cases with changing interest rates, inflation, and market developments. Whether your sponsor is holding onto refinancing strategies or capital buffering in their toolkit, they should be transparent on how the asset is securitized or leveraged to handle risk in a downtrend.


At Rev Projects, we take a conservative approach with our underwriting so that we can confidently enter a new project. We don’t stretch or massage numbers, because we believe that a well-executed business strategy that results in strong investment performance is more important than persuading investors with fanciful projections.


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4. Investor References


One organic way to gauge reliability is to speak with another investor that has partnered with your sponsor in the past. Asking questions not only about their realized returns but also observations regarding a sponsor’s communication skills may provide valuable insight. 


Some questions to consider:

  • How did the sponsor handle setbacks?

  • How did the sponsor communicate with his investors and how often?

  • Was the sponsor transparent and honest throughout the project?

  • Were you satisfied with your achieved returns given the economic environment and the challenges of the project?


There are multiple opportunities to engage with other investors, whether that’s through sponsor-held property tours or referrals. At Rev Projects, we appreciate the loyalty of our investment partners and frequently host property showings for new or current deals, in which investors get the chance to connect with each other. 

COPYRIGHT | REV PROJECTS 2020