How to Become a Good Real Estate Investment Sponsor Even the most attractive construction real estate investment can experience volatile performance. Preparing and dealing with systemic and non systemic investment risk presents enough concerns for investors.

1. What Factors Make a Good Real Estate Investment Sponsor
How to Become a Good Real Estate Investment Sponsor
Even the most attractive construction real estate investment can experience volatile
performance. Preparing and dealing with systemic and non systemic investment risk presents
enough concerns for investors. Investors want more than anything to mitigate the risk
associated with the real estate investments. One of the principle methods at reducing real estate
investment risk is to effectively evaluate the investment sponsor. We will review the most
desirable character attributes and best practices that distinguishes marginal performing
sponsors from high level performing sponsors. One of the most important questions investors
must ask themselves is; Is the sponsors interest aligned with the investors?
Role of the Sponsor
The principle role of a joint venture or private fund sponsor is to provide transparent leadership
in indentifying, securing and operationally developing profitable opportunities for the
stakeholders. The investment sponsor has a fiduciary duty to the investors by defining and
sharing the foreseeable risk associated with an investment.
The process begins with locating properties that meet the investment criteria of the private fund
or partners. This is achieved through investment offering documents such as a , financial
proforma’s and private placement memorandums. Once the subscriptions are filled or the invest
joint venture agreement is executed, the sponsor will get a property under contract. The
sponsor is responsible for securing the property into escrow, developing the due diligence
research & documents and arranging the required capital to complete the transaction.

2. Once the property has closed escrow, the sponsor is responsible for the management of the
operations of the fund or venture, construction operations, the financial affairs & reporting
duties and the marketing & sales of the finished product. These functions can be achieved
through outsourcing them to third party professionals or employees of the sponsor.
The sponsor is also responsible for carrying out the terms of the venture or fund and making the
appropriate capital distributions as required at the completion of the project. In the case of a
joint venture, the sponsor will wind down the investment entity at the completion of the sale
and taxes of the project. In the case of a private fund, the sponsor will roll the funds into the next
project until the expiration of the fund matures.
Sponsor’s Past Experience and Performance
Since the sponsor is typically the last word on management of the venture / fund’s capital it is
essential that the stakeholders develop a comfort level with the sponsors ability and can
instinctively trust that he is acting in the best interest of the entity stakeholders.
Investors should always conduct their own due diligence of the sponsor and the proposed fund
or venture. This begins with the investors obtaining a good understanding of the sponsors
experience both qualitatively and quantitatively. Determining the sponsors background, project
experience and performance results will provide the investor with a solid foundation.
Developing carefully thought through questions about difficult situations in past projects will
assist the investor in getting a gut check moment of the like minded thinking of the sponsor in
resolving important issues as they develop. Asking in depth questions about past projects
failures will provide some insight to how the sponsor reconciles loss and treats past partners in
difficult situations.
If available and willing, exploring anecdotal evidence by having a conversation with past
customers or other investors will go a long way in developing a clearer understanding of the
sponsors integrity and moral compass. For if the investor cannot develop a comfortable
confidence in working with a sponsor, there is little reason to move forward with evaluating the
merits of the deal. No return on investment is worth jeopardizing your time and principle
investment.

3. The Merits of the Deal
Having established a comfort level with the sponsor, it is time to evaluate the deal. No single deal
is ever the same as a past deal. There may be similar terms and characteristics of past deals, but
construction real estate investments are a dynamic and volatile investments. Special
consideration should be given to both systemic and non systemic risk factors.
Systemic risks of construction real estate deals are associated with primarily market risk like
increasing interest mortgage rates, local impactful economic issues like oil prices in Houston
and a possible national economic crisis’s. The longer the time duration of the investment project
the higher the unknown risk becomes. Although there are appropriate alternative strategies that
can be developed to hedge these risk, investors should understand these options.
In the case of non systemic risk, the greatest risk to the profitability of a construction real estate
investments are cost estimating, cash flow liquidity and interest carry from poorly performing
finished product sales. Unlike systemic risk, the non systemic risk are inherent to the
construction real estate investment and can usually be identified and addressed. In all these
cases, well designed contingency plans and alternative liquidation strategies should be
developed and in place ready for implementation.
In most cases the financial pro-forma should include the financial fundamentals and
assumptions to clearly understand the risk associated with return. If the fundamentals do not
make sense, then the deal is not likely to make sense. At the very least the numbers will require
further research.
Financial & Deal Structure

4. Understanding the deal structure is essential in being a good partner and contributing
stakeholder in the venture or fund. For venture structures it is important to understand your
decision making rights concerning acquisitions, capital calls, refinancing and investment sales
terms. If the venture has been structured as a legal entity, the members agreement is the
defining terms. There is likely a very defined treatment for major decisions by proxy of the
governing body of the entity.
In the case of the private investment fund, the terms are likely to be found in the prospectus or
private placement memorandum. In these structures the investor should understand that they
are likely to be in a passive role as an investor with limited rights of an operational decision
making. Their rights are more defined by the subscription agreement that also defines the
number of specific securities at a specific price. In return the fund provides periodic capital
distribution in the form of profit allocations through tiered equity positions commonly called
the waterfall.
In a private fund investors should understand the catch-up provisions and how the sponsor
makes money through fund fees and load carry. The catch-up is the repayment of investment
principle amounts paid back to investors at a specified percentage rate. The fund fees are paid to
the fund management team for the services they provide to the fund. The carried interest are the
provisions of carrying the funds capital forward deal to deal. Understanding these provisions are
of great importance to the investor as well as the terms of exiting the fund. For most private
equity funds are closed ended and have very special provisions for new members or existing
members exiting the fund.
Summary
The success of a construction real estate investment lies firmly on the abilities of the sponsor.
The sponsors ability to seek out construction real estate opportunities that are consistent with
the investors interest and execute in accordance with investors expectations is ultimately the
goal. It is a seasoned sponsor that provides reliable stewardship with the investors capital that
makes for a long term relationship.
Source Url. https://www.marwoodconstruction.com/investor-articles/what-factors-make-a-
good-real-estate-investment-sponsor/