A sponsor in real estate development is an individual or company responsible for finding, acquiring, and managing a real estate project on behalf of the project’s developer and investors.
Many commercial real estate deals (as well as some complex residential deals) benefit from having a sponsor to handle the project from start to finish for the limited partners who invest in the deal.
In this article, we will look at:
- The role of a sponsor in real estate development,
- The benefits of working with a sponsor as a developer, and
- Ways to evaluate potential sponsors to partner with.
The Role of a Sponsor in Real Estate Development
The role of the sponsor in real estate development is to manage the development in such a way as to maximize returns for everyone involved.
Sponsors generally handle the acquisition and management of a property, including the following responsibilities:
- Vetting potential projects. A good real estate sponsor might conduct due diligence reviews of dozens or even hundreds of properties to select one or two projects with enough potential to present to investors.
- Forming the ownership LLC or Trust. The sponsor is responsible for creating the ownership entity that will hold the deed to the property. This includes managing the investment documents in accordance with SEC requirements.
- Assembling the development team. The sponsor connects architects, builders, designers, and landscapers to execute the construction of the development. For long-term projects (such as multi-family rentals), the sponsor may also engage the services of a property manager to handle ongoing tenant relations.
- Securing financing. Sponsors leverage their value and clout to secure any additional financing needed in terms of mortgage loans or construction loans. For long-term projects, the sponsor may also consider strategic refinancing to leverage the equity in the property.
- Managing the development process. The sponsor oversees the construction of the structure(s), focusing on the development schedule and budget.
Financial Involvement of a Sponsor
While we have already mentioned that the sponsor can secure financing, but it’s worth diving a little deeper into the sponsor’s financial involvement in a development.
Firstly, in most cases, the sponsor will put up some of their own capital into the deal. These equity investment contributions raise the stakes for the sponsor, incentivizing them further to maximize returns on the project.
Secondly, sponsors can find investors to bring into the deal. Strong sponsors have a network of thousands of investors. This enables sponsors to market new projects to willing investors as opportunities arise.
Finally, the sponsor can handle the ongoing financials, including loan draws as needed for the project, keeping careful financial records, and maintaining transparency for the investors.
Benefits of Working with a Sponsor in Real Estate Development
Developers who partner with sponsors have many advantages over developers who work alone, including
- Management of day-to-day tasks. Many real estate developers want to focus on construction but find themselves spending too much time on the day-to-day management of administrative details and investor relations. A sponsor can take that off your plate, allowing you to spend more of your time doing what you love.
- Professional expertise in navigating complex development processes. Sponsors can complete several developments per year and have a wide range of industry expertise. Good sponsors know the fastest-growing markets and the best states for real estate investing. They also know how to work in these markets to produce favorable results. This expertise can prevent you from making many of the mistakes to avoid when investing in real estate.
- Potential for better financing terms and negotiation power. Because sponsors do deals in bulk, they can leverage economies of scale to negotiate better financing terms and lower rates on labor and materials than an independent developer could.
- Access to high-quality projects. In some cases, a developer will bring a project to a sponsor. In other cases, a sponsor will bring a project to a developer. Sponsors often learn of unique opportunities through their vast network of industry connections, so building a relationship with a sponsor can bring you interesting development options in the future.
How to Evaluate Potential Real Estate Sponsors for Future Developments
When looking for a sponsor, you should consider the following:
- Track record. How have the sponsor’s previous deals performed? What is their average annualized return on completed projects? Have they ever lost money on a deal?
- Accessibility and communication. Will the sponsor be available to answer your questions? Can they communicate clearly and concisely?
- Transparency. Does the sponsor show the projected and actual financials? Is the sponsor clear about their fee structure or do they have “hidden” fees?
- Legal regulation. Is the sponsor properly registered with the SEC? Do they operate in accordance with SEC regulations?
- Technical capabilities. Does your sponsor have software solutions for managing investor contributions and automating processes?
Partner with Gatsby Investment as Your Real Estate Sponsor
Gatsby Investment is a California-based real estate syndication company that serves as a real estate sponsor for high-quality developers.
If you are a developer seeking a sponsor, consider how Gatsby stacks up against the evaluation criteria noted above:
- A proven track record. Our average annualized return on completed projects (through 2022) is an impressive 24.22%. And we’ve never lost money on a deal.
- Accessibility and communication. Our entire team is at your service. You can quickly and easily schedule a call with us online.
- Transparency. Our financials are open books. We post projected financials and actual financials for each of our projects, as well as information about our fees for each deal. It’s worth noting that we don’t charge upfront fees; our fee is only taken from profits, giving us additional incentive to maximize profitability on each deal.
- Legal regulation. Gatsby is registered with the SEC under rule 506c and follows all its rules and regulations.
- Technical capabilities. Our proprietary software solution automates much of the investment and management process, reducing administrative overhead and maximizing return potential.
Why manage your developments alone when you can partner with a sponsor to take the management tasks off your shoulders? We invite you to learn more about joining Gatsby in a sponsor partnership today!