Pros and Cons of Real Estate Development Sponsors

Real estate development sponsors provide several key benefits to real estate developers, but many developers are unfamiliar with the services offered by sponsors. In our recent article, What is a Sponsor in Real Estate Development?, we explain exactly what a sponsor is and how they work to ease the administrative burden of developers and increase profitability potential. 

In this article, we will focus on the specific ways in which sponsors can benefit developers, as well as the potential downside of working with a sponsor. 

These are the pros and cons of real estate development sponsors.

The advantages of working with a sponsor include:

If you’re struggling to find investors and raise money for real estate development, you could benefit from a relationship with a development sponsor. Strong sponsors have networks of accredited investors, ready and waiting for a solid development to invest in.  

As a real estate developer, you face the challenge of juggling lots of day-to-day tasks, like raising funds, investor relations, financial reporting, loan draws, and administrative project management. These tasks divert your attention from your main objective: constructing a quality development. Partnering with a sponsor effectively alleviates this burden, freeing up more of your time to focus on what you truly enjoy doing.

Sponsors bring valuable experience and skills to the table with a wide range of industry knowledge from multiple disciplines. Specialized real estate analysts can find the properties with the greatest potential, professional designers can highlight the best features of the development, and marketing experts can maximize rental rates and/or sales prices of completed developments.  

Since sponsors complete several deals each year, they can leverage economies of scale to secure more favorable financing terms and negotiate lower rates on labor and materials. As an independent developer, perhaps completing only one deal per year (or less), you simply don’t have this negotiating power alone. But collaborating with a sponsor allows you to leverage the sponsor’s negotiating power to benefit your development(s).

In some cases, developers bring their own projects to a sponsor. In other cases, sponsors may present exciting opportunities to developers. Because of the sponsor’s extensive network of industry connections, they are often altered to interesting development projects that may not be readily available elsewhere. So establishing a strong relationship with a sponsor can create opportunities in the future.

Here are the potential downsides of working with a sponsor:

Naturally, partnering with a sponsor will mean sharing the development’s profits with the sponsor as well as the investors. While this is considered a negative, partnering with a sponsor could potentially give you the resources you need to complete your development and turn a profit on the investment property. This makes the profit split well worth it. 

Furthermore, you may have some choice in the split structure with investors. Depending on whether your sponsor offers investors a debt or equity investment in the real estate development, the investors could take a smaller guaranteed return or a larger share of any profits.  

Adding a sponsor means having another party with a vested interest in the deal. As industry experts, your sponsor may have strong opinions about the direction of the development. These insights can make your development more profitable, but they can also create differences of opinion that you will need to work through.

Gatsby Investment is a real estate syndication company with an exceptional track record of profitable real estate developments. And Gatsby is now serving as a real estate sponsor for established developers!

If you are an experienced real estate developer looking to increase funding, outsource administrative management, and leverage the expertise, negotiating power, and unique deals of a sponsor, consider a sponsor partnership with Gatsby today!