An Ignoble Experiment: Not All Sponsors Are Created Equal....What Questions Should You Be Asking?

Dear Investor,

There's been a lot of hectic news in the financial markets this year – whether from fears of interest rates hikes, bank runs, nonstop talk of recessions, or inflationary concerns. The most recent news and rumors to spark discussion have been about the collapse and insolvency of several national real estate firms and crowdfunded investments.

There is a lot of news that hasn't come out about these situations yet, but looking at the big picture - the upside of these events has been that investors now seem to have put their focus back on vetting sponsors and investment managers. With that said, this email we will do a deeper dive into investment managers and sponsors and what to look for in a deal.

By way of disclosure, we have an advertising relationship with Mortar Group, 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. You must be an accredited investors to invest.

A Starting Point

With the given role of a sponsor in a real estate investment, it's imperative that the sponsor be highly experienced, and qualified.

The sponsor should bring significant expertise to an investment – whether about the track record of past work and the local market and/or a particular 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 a project through its entire lifecycle.

Not all sponsors are created equally, and some are much more qualified than others. In reviewing potential investments, all real estate deals start with a promise of high returns. At the end of the project, some deals will exceed projections while others will fall short, and some investors will lose a portion of, or all of their capital. The challenge for individual real estate investors is trying to figure out which opportunities will meet or exceed expectations, and which ones will become a tax deduction, and something to learn from.

So, how can you tell who you are working with? Here are some things to think about, or questions to ask when evaluating the capability of any sponsor:

Does the sponsor have their own money in the deal?

This is an important question. The sponsor should be investing a significant amount of his or her own capital along with the investors, or should be providing some sort of guarantee on the senior debt. 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. It is a good idea to ask if they did have a deal that did not go as planned, ask what they learned, 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 recent 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.

What systems does the sponsor have in place to ensure proper management of the project?

Evaluate their processes end-to-end, from underwriting, construction, and management - all the way through leasing and stabilization. You'll want to be sure the sponsor is very deliberate in how it manages the project and the schedule it keeps in doing so. A sponsor should create offerings that have multiple exit strategies, where one can maximize investor returns or protect capital in different parts of the market cycle.

Ask for References

Like with any other important decision such as 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 from investors who had previously invested with them. Some 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.

What fees do you charge?

An important 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. One is transaction fees, which are secured and used to operate the investment over the life or term of the asset. The other is 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.

May I withdraw or cancel my subscription request?

This question is one not asked often, but it comes up on occasion and it can be important to new investors. If an investor commits to the project, and given the illiquidity of real estate investments, when does an investor get locked into a deal?

Different sponsors have several processes for this this question. For example, at Mortar Group – if an investor signs up for a project, any investment offer may be cancelled at any time before documents have been accepted and executed by the Managing Member. Once subscriptions have been accepted investors also have a 30-day no risk period, in which any investment commitment may be canceled for any reason within 30 days of funding.

If you're interested in discussing this topic more, or you are interested learning more about how to better vet a sponsor or investment offering, feel free to schedule a call with Mortar Group here: Schedule a Call

Also feel free to view other recent resources from Mortar Group.

Mortar believes in experience and smarter real estate investing. Their fully integrated in-house design, development, and asset management expertise has resulted in dozens of successful privately syndicated deals. This, combined with skin-in-the-game co-investments and in-depth local neighborhood knowledge, helps Mortar mitigate risk and maximize investor returns. Focused opportunities combined with an intimate knowledge of New York's prime niche neighborhoods allows investors to diversify and deploy capital conservatively in projects and divest risk throughout the real estate lifecycle.

Mortar Group extends White Coat Investors access to exclusive opportunities on new offerings. If you would like to know more, please visit their website, or reach out to Investment Relations Manager – Francesca Gaccione at 646-559-9471, or gaccione@mortargroup.com.