For anyone to understand the value, diversification and time freedom of real estate syndications you must understand what a real estate syndication sponsor does. When deals are put together in the syndication world there are two types of partners; the General Partner (GP) and the Limited Partners (LP). The General Partner is also known as the deals "sponsor".
A Sponsor is the individual or team who researches, acquires and manages the projection from start to finish. The sponsor is responsible for all components of management, operations, raising capital and signing the loans.
The LPs are the investors in the deals as passive partners who have a limited liability. They put trust in the GP to manage the property to create upside return with limited downside potential. The sponsor plays a major role and usually creates a deep relationship with the LP due to these deals being a 5-7 year hold.
Syndication Sponsors can spend weeks to sometimes years finding deals on or off market. The sponsor will then negotiate terms, perform underwriting of the deal, and prep all of the materials for the deal. Sponsors will then begin raising equity capital and finding a debt financing as well. Sponsors will often hire 3rd parties as well to help perform due diligence.
Sponsors put a tremendous amount of effort and time in evaluating and analyzing deals, as well as underwriting the deal. There is an acquisition fee that is apart of every deal to cover this time and effort.
After the deal has closed and been acquired the sponsor takes over the full time operations and management which entails leasing, maintenance and repairs. Commercial RE creates economies of scale which allow sponsors to have a full time leasing agent on location, as well as an on site repair and maintenance professional.
Sponsors also must be great communicators. Typically sponsors will create. monthly or quarterly investor letters or updates. Always read the operating agreement to get an idea of the communication style the sponsor will utilize and ask deeper questions. Finally sponsors will put together the K-1 and typically leverage savvy accounts who specialize in real estate so that you are prepared for tax season.
Sponsors get paid through acquisition fees (which. we touched on above). Sponsors often also invest in their own deals, (the average is around 10%). This aligns interests of the sponsor with the LP.
Sponsors will also create preferred return which gets back the LP original capital plus additional return above and beyond. (check out this past write up of waterfalls to learn more). After this preferred return is met a sponsor will get a % as well, which incentivizes all sponsors to perform above and beyond.
Lastly, when it comes to getting paid, sponsors also take an annual asset management fee. This should always be disclosed within the documents from the sponsor.
The role of the sponsor is to manage literally everything within any deal. They find the deal, raise the capital, find debt partners, manage operations and prepare the K-1's for taxes, and create returns for investors in a passive way.
If you would like to learn more about passive real estate syndication reach out to our team, and check out our youtube channel to continue learning about the benefits of commercial multifamily investing.