One of the most common questions we get from potential investors is “How do I choose or evaluate a syndication sponsor?”. It is an excellent question to ask and one we are pleased to walk through with potential investors. When investing in a syndicated multi-family investment you are not only investing in the property, but also in the sponsor.
First let’s take a look at what a sponsor is. A sponsor is the party putting together the syndicated investment – finding the property to invest in, performing due diligence, arranging financing, gathering capital from investors, buying the property, overseeing renovations and management, making investor distributions, and so on. So obviously the competency of a sponsor is a very important factor to evaluate.
There are 5 key attributes to look at when evaluating a sponsor. They are:
- Deal Criteria
- Conservative Underwriting
- Their Team
- Proven Track Record
Ask how long they have been a syndication sponsor. Some players have been active in real estate or maybe raising capital, but have just recently started syndicating properties. You want to find out if a sponsor has been around long enough to go through various market cycles, economic cycles, high interest rate and low interest rate environments. Inquire about how many acquisitions and dispositions they have done. This will tell you if they have experience in the full cycle of owning and selling properties. Does the sponsor have experience in all the realms of ownership and operation of a property? Does the sponsor have the systems in place for following regulatory rules, communicating with investors, record keeping and tax document preparation?
Deal Criteria and Market Criteria
A sponsor should know what the metrics are for properties they are going to pursue. For example, Mission Bay Capital Partners targets multi-family properties, with values of $30 million and below, with 100 or more units, that are A- to C+ properties in areas that are B+ rated or better, located in areas having a median annual income of $40K+ with a diverse employment base. Furthermore, we look for rents that are $100 below nearby comparables, cash on cash returns of 8%+, and properties with value add potential.
We all know that location is one of the keys to successful real estate investments. By having strict criteria for the markets the sponsor targets you are better positioned to achieve outsized returns. Mission Bay Capital Partners focuses on growing markets with diverse economies with MSA populations over 100,000, having at least 1.5% population growth and job growth annually for the last two years. By narrowing our focus to healthy growth markets we have been able to achieve excellent returns for our investors.
The real question to ask is “what makes your underwriting conservative?”. What average annual return (AAR) and internal rate of return (IRR) are they projecting. What is the cash on cash return? How long does the sponsor anticipate holding the property before selling? What are the projections for rent growth, renovation cost, taxes and insurance, leverage and loan terms. A sponsor with an experienced underwriting team will make sure the projections are accurate and modeled on the conservative side so the investment will outperform the projections. Look at the numbers being used and not just the 7 year pro forma.
As we previously said you are not only investing in a property, but the sponsor as well. A sponsor is a team of people, each of which are experts in a facet of the syndication. Not only is there the staff that work for the syndication company, there are other experts for accounting, taxes, legal issues, and asset and property management that are part of the team. Mission Bay Capital Partners uses an accounting firm that specializes in real estate syndications and they do the accounting for the LLC and prepare the investors K-1 forms in a timely manner. We also work with a law firm that specializes in real estate and in syndications for all our contract reviews, purchase/sale documents, and SEC filings. We work with a very experienced asset management company and property manager for day to day operations of our properties. Make sure the sponsor is teamed up with experts with experience in these specific areas.
Be sure to look at how many properties the sponsor acquired and how many they have sold. How did the properties that were sold perform as compared to what was projected. See how long the properties were held before disposition. A good sponsor will have been through market and economic ups and downs as well as the full cycle from acquisition to disposition of properties.
We are always open to discussing what you need to evaluate when you are looking for the best sponsor for your investment dollars. You can schedule a call here and we will be happy to go into more detail. If you would like to view one of our webinars on this subject sign up here.
At Mission Bay Capital Partners we take pride in making investing in multi-family real estate simple, transparent, and profitable.