This article is part of our passive investors guide on real estate syndications, available here.
The real estate sponsor is a critical player in the development of any large real estate deal. A real estate sponsor typically brings financial & legal support, a proven track record, and experience, day-to-day management, and execution. They put the real estate project together and offer up equity to select investors to join as limited partners (passive investors).
In this article, we’ll explore the role and responsibilities of a real estate sponsor; we’ll break down their typical fee structure and what the sponsor means for the success of a given real estate project.
What is a real estate sponsor
A real estate sponsor, which is interchangeably referred to as “the syndicator,” “the operator,” or “the general partner,” is an individual, individuals, or group that’s role and objective is to identify and locate properties that can produce a substantial return—followed by acquiring and executing on the business plan and managing the project on behalf of its equity investors to ensure future performance.
Generally, real estate sponsors put together large real estate projects ranging from acquiring built property in the residential or commercial arena to a redevelopment project or a brand new ground-up construction project. For example, here at Willowdale Equity, we acquire as is built (meaning existing already built property) large multifamily apartment communities with a significant value-add upside.
Although acquiring an asset that provides capital stability and strong preservation of our and our investor’s capital is what we get with economies of scale of a large apartment complex, the value-add component indeed provides a significant upside and above-average return profile for investors’ capital.
Why is a real estate sponsor needed
A real estate sponsor is needed to ensure that you, the investor, have an opportunity to deploy your capital into a strong risk-adjusted investment instrument and ensure that the project is being run optimally and executed to the highest degree.
The value of a strong sponsor
Although to some, real estate investing in significant commercial real estate assets may seem relatively straightforward once the average investor has a strong understanding of how it functions, there is still an array of very sophisticated in-depth underwriting and analysis that a real estate sponsor conducts to ensure the project at hand fits the box.
Investing in large apartment complexes is not as simple as purchasing a single-family home, which many investors understand as they likely have gone through buying their own home. For any real estate fund, real estate syndication, or real estate investment trust (REIT), this is a full-time job requiring a very in-depth level of know-how and expertise to identify opportunities that the next investor may not see. As well as forecasting the outlook of a local market and then the ability to execute between the lines daily.
The brokers reserve good deals for the sponsors they know can execute and successfully get the investment property across the finish line, so they can get their client (the seller) paid. But what gives the edge to the sponsor is the fact that even if you think you can go out and try and purchase the same type of opportunities, it would be challenging to get access to these types of opportunities.
This is because the properties a sponsor can lock up under contract mainly due to their reputation and relationships that have taken them years and sometimes decades to build.
These private real estate investment offerings are deals created through these intangibles mentioned above and only open up to a select group of real estate investors to invest alongside the sponsor.
The real estate sponsors role and responsibilities
The real estate sponsor is generally the only investor in the real estate project that has the role of executing 100% of the duties of a project and in a day-to-day fully active role.
Some of the duties and responsibilities include the following:
- Dealing with the seller
- Dealing with the lender
- Dealing with the real estate broker
- Identifying a great real estate deal to close on
- Underwriting and generating financial models and projections for the transaction
- Obtaining a mortgage for property and sometimes providing personal guarantees on the debt
- Executing physical and financial due diligence on the target property
- Putting their money on the line to secure and lock up a deal under contract (which could be lost if the deal fails to close)
- Cover all the due diligence costs out of pocket regardless of whether they end up successfully closing on the deal.
- Managing or overseeing on-site property management to run the day-to-day operations
- Performing asset management daily to ensure we are in line with the pre-acquisition project projections
- Compiling an elaborate business plan of attack, then staying honest about it, and executing that vision
- Finding new investors who qualify and maintaining contact, and reporting to them is a continuing process.
- It maintains communication with investors.
- Proving investors with k-1 tax forms every with their share of the profit, losses, and deductibles
- Closing on the deal
- And much more!
Fees and Profit share Structure
Every deal and every sponsor structures things differently, which are essential to note. Still, for the sake of this article, I will give you specific numbers for different types of fees and how ownership is structured in a typical deal.
The acquisition fee is generally between 1%-3% of the property’s total purchase price, and some sponsors might base this fee on total capitalization. Total capitalization means the purchase price plus all costs associated with the transaction, including the construction budget.
Loan Guarantor fee:
This is the fee the person or persons are compensated for helping the sponsorship group meet the net worth, liquidity, and sometimes experience requirements that the lender requires. This fee might be 0.5%-1% of the loan amount.
Asset Management fee:
The asset management fee is a small fee to cover ongoing costs throughout the project to operate the deal. Such as compensating asset managers whose sole focus is to oversee that the property management is executing and the project is staying honest to the project’s initial projections.
This fee is to offset payroll for the asset manager and to cover the cost of preparing a proper k-1 tax form from a certified accountant for all the investors in the project at the end of each year. This fee is generally between 1%-3% of the monthly gross rent of the apartment community.
Capital Transaction fee:
This fee is generally implemented for refinancing the debt on the property at some point in the deal and then once the deal is sold. Not all sponsors will charge this, and if they do, some might only charge it once, and it is generally something like 1%-1.5% of the loan amount. Putting together financing can be time-consuming, as the lender will continuously request various documents, spreadsheets, proformas, renovation budgets, and other details on the deal, which becomes a full-time job.
The fee is implemented to compensate for the extra time it takes the person in this role to secure the best financing terms for the project and on behalf of the investors.
Construction Management fee:
Construction management is one of the most challenging parts of the value-add real estate business. Ensuring that construction is optimally being executed on and within the allotted timeline means that the manager overseeing the construction project needs to be incentivized to ensure that this critical part of the project goes as planned. This fee might be somewhere from 5%-15% of the renovation budget.
The Promote/Ownership Structure:
The ownership structure of a real estate syndication varies from deal to deal, and many factors influence who gets what ownership percentage. But as a general structure, 70/30 is most typical, meaning 70% of the ownership is awarded to the investors, and the sponsorship group retains 30% of the ownership.
Loan sponsor definition real estate
A loan sponsor, who is sometimes interchangeably referred to as a “loan guarantor,” is a company or individual who would join the deal as a general partner (GP) to help satisfy net worth and liquidity requirements that need to be met from the lender to qualify for the best rate and terms for debt on the project at hand.
Most lenders like to see the sponsor group collectively have a minimum net worth of the loan amount and have around 10% of the loan amount liquid in cash accounts, and this cash cannot include the money raised from outside investors for the deal. Again, these amounts can be made up of 1 sponsor or however many sponsors in the deal it would take to hit the lender’s minimum requirement.
Loan sponsors are often involved in commercial real estate deals because the size of the deals that a sponsor is syndicated to is generally considerable and sometimes much more extensive than their net worth and liquid cash position. This is also generally why the sponsor may not be able to put in as much money as he may want in the deal.
That is because once he does, the sponsor losses some of his liquidity on hand that he can show the lender for the subsequent acquisition, so it’s always a balancing act for sponsors to ensure they have as much “show me” cash on hand to effectively meet the lender’s satisfaction for each deal moving forward.
Loan sponsors typically charge a fee for their services and may also take a share of the profits from the deal.
Why do real estate syndicators charge fees?
The primary reason sponsors charge fees is that they are taking on significant risks by putting their capital at stake to get a project off the ground and cover some administrative costs. Furthermore, sponsors have extensive knowledge of developing and managing a property from start to finish. And lastly, sponsors can bring in equity investors to help get the project off the ground by providing up-front capital, which keeps real estate deals from happening all the time.
How to find a good real estate sponsor to invest alongside with
Finding a solid real estate sponsor can sometimes be challenging if you don’t have a reliable, warm network. Although nowadays you can discover new real estate sponsors through reading articles like these or discovering them on social media, you can also find them on select crowdfunding sites.
But generally, because most sponsors/syndicators are privately held companies, it’s always good to continue to educate yourself with whatever content they are putting out and get to know who the sponsors are and whether you like or trust them.
At the end of the day, it’s about whether you trust the jockey because that’s whose expertise you’re betting on and who will become the fiduciary of your capital.
Frequently Asked Questions About Commercial Real Estate Sponsors
The typical acquisition fee in a real estate syndication is anywhere from 1%-3% of the property’s total purchase price.
The acquisition fee in a real estate transaction effectively comes from the capital raised from equity investors before closing on the deal. But it is important to note that when the sponsor invests their own capital in the deal, their money also sits on the same side as limited partners (LPs), which effectively means that a percentage of their dollars also goes towards funding the acquisition fee.
A promotion is the equity split the sponsor/syndicator retains for putting the deal together, managing it, and executing it. A typical promotion structure for a real estate sponsor is 30%. However, it varies depending on many factors, such as the level of risk, return expectations, capital required, the size of the deal, and much more.
A sponsor makes money by executing on increasing the property value. As a result, the sponsor’s equity position grows in the deal, and they can capture this when the deal is sold, just like investors. Also, a sponsor is compensated for specific fees associated with the deal and can earn more in the form of the cash flow from the deal if they over-deliver on certain return hurdles set out in the partnership.
Real Estate Sponsor - Conclusion
As you can see, the sponsor has a lot of responsibilities and is an integral part of any large real estate deal. They play a crucial role in bringing together all the pieces that make up the project: financial support, legal knowledge, and day-to-day management. They also provide an equity investment opportunity to other equity investors who want to be involved in the deal.
At Willowdale Equity, we offer private investment opportunities to select non-accredited and accredited investors in our future acquisition of large value-add apartment communities across the Southeastern United States. To learn more and get access to our exclusive investment opportunities, you can join the Willowdale Equity investments by clicking here.
You’ll Get Access To:
- Our Private Investor Portal
- Private Webinars
- Our Resources
- Exclusive Investment Opportunities
- And Much More!