Sponsors are the representatives of real estate deals for investors and developers. To maintain a good reputation and continued deal flow, sponsors need to provide high-quality service, which means a smooth deal transaction from beginning to end.
When working with a sponsor, investors can increase their odds of a smooth deal transaction by understanding what sponsor risk is and what to look for in managing those risks. Let’s see how.
Sponsors put together real estate deals. Sponsors are sometimes called syndicators. They bring real estate deals and investors together. They also manage the deal through to exit. For their services, sponsors collect fees.
Rather than going out and finding a deal on their own or waiting for a deal flow to cross their desk, real estate investors can turn to sponsors. Sometimes a sponsor will even seek out investors. Many sponsors already have a ready pool of investors within the network.
Some of the responsibilities of a sponsor are to find deals, investors, and secure and structure financing. Basically, the sponsor handles all aspects of the investment deal. For investors, the deal can be fairly passive, if not completely passive.
Assuming the price is right (i.e., sponsor fee compared to returns), utilizing a sponsor can benefit investors. But like most investments that seek to deliver above-average returns, there are risks to consider.
Below are a couple of areas to look out for specific to sponsor risks:
In the next section, we’ll go over what to look for in a sponsor, which can help manage and further identify sponsor risk.
Sponsor risk doesn’t have to be something that occurs after the fact (i.e., after you’ve gotten into a deal). Thorough vetting of a sponsor can be helpful when pursuing a successful deal. Below is a long list of things to look out for when choosing a sponsor:
If you are going through a sponsor that works with a broker-dealer, the broker-dealer should also perform due diligence on the sponsor.
The above list is not exhaustive but will help weed out some risks. Your local realtor may also be a good source for a sponsor referral.
One of the worst sponsor risks is a sponsor who commits outright fraud. While fraud is rare, investors should remain on guard for potential red flags (per the above list) throughout the deal.
Investors can better manage potential sponsor risks by knowing what to look for, whether dealing with an existing or a new sponsor.
Past performance is not a guarantee of future results. All real estate investments have the potential to lose value during the life of the investment. There is no guarantee that the investment objectives of any particular program will be achieved. The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that it will be able to pay or maintain distributions, or that distributions will increase over time.