Real Estate Sponsor Definition

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Contributor, Benzinga
November 10, 2022

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A real estate sponsor in the simplest terms is an individual or team who acquires and manages property for their investor. Real estate sponsors can be a critical piece to a real estate syndication deal, responsible for taking care of important tasks from start to finish, such as; finding a suitable property, obtaining financing, and seeing the transaction through to either a sale or termination. Sometimes referred to as a General Partner (GP), this individual or team has an ongoing role in leasing, management, and day-to-day operations of all acquired properties. However, they are eligible to hire a 3rd party for management duties, which they still oversee.

Real Estate Sponsor Example

In commercial real estate, sponsors are used frequently. For example, the sponsor finds an apartment building in need of a renovation that may or may not be on the market. With extensive research, they determine the amount of money that needs to be invested or financed and present an offer to the owner. After finding investors on their own or through a platform like crowdfunding and securing the deal, the sponsor then takes the reins again and does all the due diligence needed in order to renovate the property. 

The sponsor oversees every aspect of the deal and technically owns the property. Their name is on all of the documents. Their investors are “silent investors” and “limited partners” who have much less risk and responsibilities. The sponsor gives quarterly reports and pays the investors on their agreed-upon rates. Once renovations are complete, the sponsor then moves on to leasing the property and maintaining it. They will either continue to manage the building or get a deal ready to sell the property if that is the plan. 

How Real Estate Sponsors Make Money

These real estate sponsors definitely don’t work for free. There are several ways that they can make money through these deals. 

Acquisition Fee - For finding the property and getting successfully through to the purchase, the sponsor can make a percentage of the purchase price as a one-time fee. If the apartment building costs $2 million and the agreement is 1% of the purchase price, they receive a one-time payment of $200,000.

Direct Investment - Real estate sponsors generally invest 5-10% of their own money into their deals and can make money on their investments over time, like the rest of the investors. 

Preferred Return - In this case, the investors are able to make their full return on their investment, plus additional funds over a predetermined threshold. The sponsor is then given a percentage of the above-threshold returns. This will encourage the sponsor to make sure the project performs above and beyond. 

Annual Asset Management Fee - This is a fee that is usually tacked on and made known in the investment documents, where the investors can see how much and when plus negotiate if needed. 

Q

What is a sponsor in real estate?

A

A sponsor in real estate is someone who finds, acquires, and manages real estate assets for a partnership.

Q

How do real esatate sponsors make money?

A

Real estate sponsors make money by charging fees or by the return on investment of the properties they acquire.

Q

Do real estate companies sponsor?

A

Yes, real estate brokers sponsor real estate agents who do not have a broker’s license.

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