A real estate sponsor is a principal investor in a real estate deal, responsible for sourcing the investment and executing on its business plan. In many cases the sponsor has a background in asset management and construction/development, as well as real estate finance.
In EquityMultiple investment offerings, EquityMultiple acts as the limited partner, working with a general partner, also known as a sponsor. EquityMultiple opens the investment to accredited investors and funds a portion of the project, however the planning and development is all overseen by the sponsor. While some sponsors may hire a third party property manager for day-to-day management, they are still solely responsible for the entirety of the project.
Commercial real estate sponsors oversee the acquisition of a project, contract underwriting, development of marketing materials, sourcing of capital, all financial reporting, property renovations and operations, investor distributions, and eventually the property’s refinance or sale. In short, they are in charge of sourcing the property, developing the capital structure, and ultimately executing the business plan. Because sponsors do the heavy lifting, real estate investors are able to earn passive income, not taking part in any of the operations of the property they invest in.
Not only are general partners accountable for the success of the real estate transaction, but they are expected to have skin in the game by co-investing their own capital alongside limited partners. Sponsors typically invest at least 5% of the total equity, though some may invest up to 20%. This practice ensures that all partner interests are aligned, with the sponsor indicating confidence in their plan.
Given the important role of the sponsor, due diligence is critical in selecting investment opportunities, both by EquityMultiple and individual investors. EquityMultiple looks to continue to build relationships with reliable, high-quality sponsors and form partnerships that span multiple projects. Where appropriate, EquityMultiple may provide a webinar interview of the sponsor regarding specifics of the investment, the sponsor’s track record, and the firm’s operating philosophies. This information may be found in the Offering Memorandum for every real estate investment on the platform.
An EquityMultiple Example
EquityMultiple recently invested with a sponsor that has acquired properties in locations with strong submarket demographics and partnered with a seasoned regional car wash operator. Their plan was to develop exterior car washes, with all requisite equipment and administrative offices. Their intent was to exit through a sale or refinancing of the properties within three or four years. With a target hold of 36 to 39 months, construction was generally expected to be completed over a six to nine-month period.
During the construction phase, EquityMultiple’s Asset Managers kept in touch with the sponsor and general contractor on a weekly basis to monitor progress, handle change orders, and manage contingencies. Pay applications were provided monthly, which EquityMultiple thoroughly reviewed to ensure costs were in line with budget. During the first few months of operations, EquityMultiple maintained the same cadence of contact. As operations stabilized, reporting moved to monthly and quarterly cadences.
All offerings from this sponsor exited with strong return metrics, illustrating the compelling nature of their initial investment theses. More on this case study can be found in this article.
The Bottom Line
Sponsorship involves substantial industry experience related to both the asset class and markets they operate in, including knowledge of the local markets history, leasing dynamics, project management, relationships with third-party vendors, and how to deal with all real estate investment stakeholders. Passive investors should consider the experience and track record of the sponsors on all their prospective investments.
If you are curious about the details of a particular offering, please feel free to contact Investor Relations.
This document is for informational purposes only and is not an offer or solicitation to purchase or sell securities. Investing involves risks, including the potential for principal loss. There is no guarantee that the strategies and services will be successful or outperform other strategies and services. Certain assumptions may have been made in connection with the analysis presented herein, and changes to the assumptions may have a material impact on the analysis or results.
¹Past performance is no guarantee of future results. The investments discussed herein may be unsuitable for investors depending on their specific investment objectives and financial position. Investors should independently evaluate each investment discussed in the context of their own objectives, risk profile and circumstances.
All opinions expressed herein constitute the author’s judgement as of the date of this article and are subject to change without notice. Statements made are not facts, including statements regarding trends, market conditions and the experience or expertise of author are based on current expectations, estimates, opinions and/or beliefs. Such statements are not facts and involve known and unknown risks, uncertainties and other factors. Past events and trends do not predict or guarantee or indicate future events or results.