Assess GP Company Background
In this article we talk about the assessment of the background of the general partner prior making an investment with them.
You should absolutely investigate a company’s background prior to investing your hard-earned money with them. You want to understand their approach to commercial real estate investing and see if there is a fit.
Do they specialize in a specific market niche?
Do they target a specific geographic location or present all around the country or internationally?
Do they look professional at first glance? Do they have a website?
First of all, you are looking to invest with a professional company which you would be willing to invest your money with. Real estate is a long-term investment and a change of sponsor is at least costly and painful if at all possible. Thus, you need to perform your best due diligence on a sponsor before considering the property they offer.
In evaluating a sponsor, consider how long they have been present in the market. Did they manage to build a recognizable brand during these years? How much of the capital under management do they have at the moment? How did that change over the last 2, 5, 10 years?
Ideally you would like to see consistent growth in the assets under management over the timeframe of the sponsor’s tenure. How many deals do they have available at the moment? Are they able to source the deals and do they have connections in the market?
Try to check if they have enough human resources to put enough effort into managing your deal. Did they grow the team together with the level of assets under management? Did they manage to establish proven systems for taking care of most or all aspects of real estate investing and property management? What is the level of their technological progress?
These are all important questions to consider. A sponsor’s ability to manage their internal operations the most optimized way possible directly translates into their ability to optimize the management of your property / portfolio as well.
Additionally, you have to do your best to identify whether a manager will be able to add value to your bank account and not destroy value. Even if the deal appears highly attractive, be very mindful about the management of a sponsoring company. Who are the managers of the sponsorship company? What are their specific qualifications and experiences in the market?
Apart from analyzing their bio in the offering materials, try to find out any detailed information about their senior managers from your own connections in the market if you have any. Feel free to contact their references and ask about a specific person. Try to confirm their specific qualifications and level of experience. Some of the deal sourcing websites, like Realty Mogul for example, perform not only historical performance checks on the companies but also criminal, background and credit checks for the companies and their management team as a part of their due diligence. Credit checks bring to light past issues with financial institutions, contractors or any unpaid taxes they owe. General background checks should give you an overview of their previous behavior, relationships with their prior clients, and an idea about their level of trustworthiness.
Finally, pay attention to a track record. A proven track record is an essential attribute of a legitimate sponsor. Your managing partner should be knowledgeable of the industries and asset types they are offering to invest in. Good sponsors often deal with experts in respective fields of the real estate market. Due diligence of a sponsor’s track record is key. They must be able to clearly explain from their past experience why the deal is worth your time and money and be clear on the risk mitigations that go along with it.
You should be clearly presented with both qualitative and quantitative past experiences of a sponsor. How long has this sponsor been active in the market? Who are their managing directors? What kind of real estate experience do they have? What is their experience in regard to a specific geographic location and asset type? Is that in line with what they are offering you to invest in at the moment? For example, a deep knowledge and experience in managing a multifamily building would not be helpful with a retail investment. The sponsor must have a specialization as the real estate market is very specific.
There are many questions to find out answers to. Did a sponsor ever fail to deliver a required return to their investors? If so, why? What did they do about it? This are all god questions to ask while evaluating a sponsor’s past. A sponsor who has been in the field for a longer period of time should have some failures on their track record.
Understanding how the sponsor handled difficulties previously should give you an idea of their downturn protection strategy and if they are prepared for bad results as much as they promise good results. Of course, past performance does not guarantee future success, but a sponsor’s projected returns compared to what investors actually received historically should help you in creating an overall picture of whether a sponsor can be a trustworthy partner or not. Be very suspicious if a sponsor ensures that all of their previous experiences were positive.