Investing in commercial property can be a daunting prospect but knowing that you are not alone can make you feel much more comfortable, which is why investors need to have a sponsor.
A sponsor can be an individual or company that takes a project from a twinkle in someone’s eye to a fully fledged development. Sponsors own the property, take care of the day-to-day running of it, watch over the transactions, speak to investors to raise funding and are responsible for the bond on the property. They manage everything, essentially, so you need to make sure you pick well.
Sponsors, often called the general partner (GP), act on behalf of the equity investors in a project. The other investors are usually called limited partners (LPs), and their liability in the project is limited to their investment.
Sponsors’ responsibility covers finding the deal, negotiating the deal and purchasing the property, securing the financing, doing all necessary due-diligence tests on the property, arranging all marketing, and pretty much anything else that needs to be done. They put a lot of time and money into the deal, so an acquisition fee from investors covers costs and compensates the sponsor even if the deal is not a success.
The process begins with the sponsor buying the property and then they oversee the leasing, maintenance and renovations, though this may actually be done by another company, the sponsor remains ultimately responsible. Financial reporting, payments to investors and tax returns are also placed squarely on the sponsor’s to-do list.
There is certainly a lot on a sponsor’s plate, but there are rewards too. They make money from the acquisition fee paid by the other investors, have ownership of the deal that ranges from 5%-10% of the total equity and receive an annual asset management fee. They are also assured of a full return of their initial investment, along with a return above a particular benchmark, or preferred return.
The success of any project hinges on the sponsor, so do your homework before signing up. You need to check that the sponsor is trustworthy, has a good track record, impeccable connections when it comes to financing, the necessary operational and management skills, and a thorough understanding of the asset class and market they are investing in, warns Scott Picken, CEO of online investment portal Wealth Migrate.
Your sponsor can really make the difference between enjoying the rewards of a successful project and nursing the pain of failure, so check that they understand how to market the project, have been part of a successful project before, can assess and deal with any risks that might become apparent and have a tried-and-tested management system to keep the project on track.