How to Vet a Syndication Sponsor
Author: Haydn Zeis, January 23, 2020
How to Vet a Syndication Sponsor
Syndication sponsors come in all shapes and sizes, so do their structures. In this article, I'm going to outline a few key questions to ask when considering a passive investment with a sponsor you may not know.
1. Sponsor Criteria
- Experience: I want to understand the sponsor's background in real estate investing and business. I want to see there's a partner who has invested through an entire real estate cycle.
- Education: This isn't a requirement but, I like to know what education the sponsors have.
- Team/Process: I want to understand the process behind asset selection and who is on the team. Who put together the legal documents and who currently represents the sponsors? Property manager, back of the house, etc. etc.
- Communication: I would like the sponsor to be reasonably available.
- Liability: I want the Sponsor to be able to show they have invested in some of their own deals.
- Track Record: I want to see the Sponsor has a track record of good real estate investments. These can be personal investments they've done alone or within the syndication. Most sponsors have experience outside of the company they represent.
- Investment Strategy: Do I agree with their investment model? Is the sponsor going after distressed property, value-add property, or turnkey? Each are different than the next. You want to verify whether the sponsor has experience in that sort of investment strategy; ask to see an example of their past successes.
- Face-to-Face Meeting: If you can, I would try to arrange an in-person meeting. This isn't necessary, but meeting in person can help add trust to the relationship you're building.
- Likability: I want to like the person I'm working with. 2. Deal Structure
- This is somewhat of a personal question based on what your income needs are. I like to see the following items in a deal structure.
- Cash-flow: I want the asset to be cash-flowing.
- Preferred Return: I want there to be a preferred return in the deal. I want the sponsor to get paid after the investors.
- Conservative Underwriting: I want to see that a deal has provided allowances for tenant vacancy, repairs, etc. I understand the worst-case scenario isn't presented in projections, but I want to know the asset won't flop or totally fail.
- Fee Structure: I take all fees into account. There are numerous ways for fee structures to be designed. Some companies will have acquisition fees, refinance fees, asset management fees, and others. I would ask for a detailed review of fees and an illustration that projects what your investment may look like when the fund refinances or sells. Most companies should be able to show a projection what your investment may look like after 7 years (keep in mind you may not be comparing apples to apples if one sponsor is less conservative in their projections than the other).
3. Other Advice:
- Education: You've already started by asking questions here! Search the forums and read books. One older, but good book I like is called, "Principles of Real Estate Syndication" by Samuel K. Freshman
- Worst Investment: I want to hear about the worst investment a sponsor made and hopefully, they'll tell you what lessons were learned.
Haydn Zeis - Principal
Lonicera Management, LLC
January 23, 2020