Dear Investor,
Navigating today's inflationary - high interest rate market can be like walking on eggshells, and sponsors and investors alike need to be careful and plan conservatively on how to successfully execute investments, and benefit for the uncertainty in the market.
Under normal circumstances - it's imperative that a real estate sponsor be highly experienced and qualified. In today's market that sentiment is magnified 10X. The sponsor needs to bring expertise to an investment – whether about the track record of past work, the local market and/or the asset class. Investors should feel confident that the sponsor has a solid reputation, strong track record, liquidity, all other essential skills and expertise needed to manage the project through its entire lifecycle.
By way of disclosure, we have an advertising relationship with Mortar, meaning we get paid for making this introduction and sharing this content. As always with these types of deals, consider this an introduction and not a recommendation. Every deal is unique and the responsibility to vet any and every deal you invest in still lies with you. This opportunity is available to accredited investors only (income of $200K+ or investable assets of $1M+).
So, how can you tell who you are working with? For new investors - here are some things to think about, or questions to ask when evaluating the capability of a sponsor:
Does the sponsor have their own money in the deal?
This is an important question, and one of the first that comes up in our calls with potential investors. The sponsor should be investing a significant amount of his or her own capital along with the investors. A partner having "skin in the game" ensures that all parties are aligned to have the same successful outcome on a project.
Have any of the sponsor's prior projects failed to meet expectations?
Any experienced sponsor is going to have deals that went well and some that didn't. This isn't always a red flag. A sponsor that has been in business through multiple real estate cycles will likely have some blemishes on their record—it's just important to understand what happened and how they adjusted during the project. In addition, we would suggest you ask that if they did have a deal that did not go as planned, ask what did they learn, and how does that carry over into their current deals. You'll want to know that even when a project hits a snag, the sponsor is committed to keeping investors updated, and working through the tough times.
How does the sponsor communicate with Investors?
Communication is often overlooked, but it is essential to a successful sponsor / investor relationship. It's important at all phases of a project, but especially when the market hits a downturn. Good managers should provide timely and accurate reporting because there is nothing worse than being in the dark and not knowing where your investment is, or how it's doing. Investors should ask for sample reports from sponsors latest deals and make sure they are delivered quarterly. Take note of what the reports cover and if the manager updates investors about both good and bad news.
Another aspect is how is the information available, or where is it kept? Does the manager have an investor portal, that is secure, where investors can have access to all their documents when they need them.
Ask for Investor References
Like with any other important decision – like a job interview or vetting a company, getting references is one of the essential steps when choosing a sponsor.
If the sponsor had previous deals, you may be able to ask for references of investors who had previously invested with them. One of the best questions to ask is if they would invest with this company again, how communication with investors was, and did they meet tax returns and financial reporting deadlines. If a sponsor cannot provide a reference, you should reconsider your relationship.
What fees does a sponsor charge?
Fees are a part of evaluating a sponsor is to understand the fees charged in a deal. Real estate investing requires a dedicated team of people to be successful and transaction fees help pay for that team, so fees are essential – but they should be understood by all investors.
In real estate investment management, there are usually two types of fees: transaction fees, which are secured and used to operate the investment over the life or term of the asset, and performance-based fees, which are paid at the end of the project cycle, based on success of how well the investment does.
Performance-based fees tend to be similar across most investments or sponsorship structures, but transactional fees can vary and be very different from deal to deal. Most investors would prefer to have all fees back ended and based on performance, and sponsors would love to have all the fees guaranteed, but that misaligns interests on both ends. The right balance is a combination of both, so the sponsor can keep the office running, build and keep a great team, and be incentivized to do well.
That said, one should understand what services are being provided, and are the fees charged for those services market rate. Sponsors can deliver a variety of services, so it's good to understand how it works.
Mortar Group
Mortar Group is happy to discuss all of the above questions with you and tell you more about what they offer investors. They extend White Cost Investors access to exclusive opportunities on new offerings. If you would like to know more, please visit their website, or reach out to their Investment Relations Manager – Francesca Gaccione at 646-559-9471, or gaccione@mortargroup.com
Learn more about Mortar Group today!
Jim and Brett
James M. Dahle, MD, FACEP
Founder, The White Coat Investor
Brett Stevens, MB
COO, The White Coat Investor
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