The Role of a Sponsor in Multifamily Syndications

For sophisticated (i.e. accredited) investors and operators in the world of multifamily, the role of the sponsor group is likely understood. However, for people who are looking to get started investing in multifamily properties through syndications, the role of the sponsor group may seem rather vague. In this post, I want to outline what the operators of a syndication group and their teams do to keep the business running and investors happy. More specifically, I will break down the tasks of a multifamily operator into five distinct subsections: acquisitions/deal flow, capital raising, asset management, investor relations, and marketing.

We must remember that sponsors get paid fees out of equity raised and cash flow and after reading this post, you’ll understand why they charge those fees. Before I dive into the meat of this post, I want to make it clear that the terms sponsor group, operators, syndicator, investment group, and managing partners all mean the same thing and I will use them interchangeably throughout this post. Also, for those who don’t know, a “syndication” is a fancy term that describes a type of investment in which a group of individuals pools together money in order to invest in a property. If at any point you don’t understand a term, you can look it up on our glossary page.

Acquisitions/Deal Flow

One of the primary roles of a multifamily syndicator is to find worthwhile opportunities to invest in. After all, if there is no deal to invest in, a syndication would not exist. Arguably, the hardest part of running a multifamily investment firm is finding deals that provide strong returns. Finding those deals involves the syndicator continuously building and maintaining relationships with brokers so they can create what is known as “deal flow.” What that term describes is the process of having brokers share investment opportunities that match the criteria of the investment group so they can have a continues funnel of deals to underwrite and hopefully acquire. The deal flow process may sound simple in theory, but realistically it takes a lot of time to build and maintain relationships, establish strong deal flow, and underwrite deals.

Investors may not realize that for every hundred deals, ten may seem to be good opportunities. Of those ten, after underwriting, two to five of the deals will be worth touring. After taking the time to meet with the broker and check out the properties (i.e. touring the deal), it’s likely that one to two will actually be worth acquiring. For those deals worth investing in, the operator will submit a letter of intent (LOI) to notify the broker they want to acquire the property. with the ever-increasing amount of demand in the multifamily space, the chances that the LOI will be accepted are decreasing. If the sponsor group is lucky enough to have their offer accepted, the acquisition process begins.

The acquisitions process is long and involves the sponsor group raising capital (more on this to come), creating an LLC, hiring a real estate attorney and SEC lawyer, finding a lender(s), conducting due diligence, and more. This process is rather stressful because at any point in time something can go wrong and with the sponsor group juggling many moving pieces, the chances that everything will go perfectly are slim. For example, interest rates can shift (as they have been) and without a secured rate, the deal could suddenly no longer make sense. Sponsor groups are expected and need to have the ability to pivot in the face of adversity. The deal flow and acquisitions process is one of the many reasons why sponsor groups charge fees (more on this in the glossary). The stress, time, and money that the sponsor team utilizes during the deal flow and acquisitions process should be compensated.

Capital Raising

Capital raising (i.e. finding equity) is a part of the acquisition process because without money, the deal would never close. Raising money may be easy for groups with an extensive track record or large professional networks. However, raising capital can be very hard for those syndicators who are inexperienced or don’t have large networks to tap into. While anyone can raise money from people, in my experience it takes a certain individual with the right skill set to streamline this process. Those passionate individuals who work incredibly hard, know what they’re talking about, and are solutions focused are the best at raising money. On our team, Jaynish and Shiv are the go-to people when it comes to working with investors to pool capital for a deal. Through a combination of natural and developed skills, they’ve been able to successfully raise capital all the while being as young as they are.

Finding equity isn’t simple by any means and involves countless meetings with potential investors and explaining to them the value that the sponsor team brings to the table. The chances that a capital raiser will secure a soft commitment is slim, but grows as experience closing deals and providing strong returns increases. As a side note, the term “soft commitment” refers to an investor’s expressing interest to invest capital. If there so happens to be a deal on the table, there is a chance that some of those investors that expressed an intent to invest can fall through. As for what reason, that varies. We all know how unexpected events can happen in life and sometimes those events, unfortunately, shrink the money that was meant to be there for investment purposes. Nevertheless, the stronger the trust between the sponsor group and the investor, the higher the chances that the soft commitment can be counted on when the time comes. As we will learn later, having strong systems and processes to maintain investor relations plays a big role in consistently being able to raise equity.

Investor Relations

Investor relations is a term that describes the person or group within the syndication business that is focused on providing their investors with an accurate account of the state of their investments as well as presenting opportunities, addressing investor questions, sending distributions, and building trust. The person or group within the business that is in charge of investor relations needs to be orderly so the information they provide to investors is accurate and expressed in a timely fashion. Most syndicators use a third-party customer relationship management software (CRM) in order to communicate with investors. There are a number of different software companies such as InvestNext, SyndicationPro, Cash Flow Portal, and more. These CRMs make it easy for syndicators to keep in touch with existing and potential investors by streamlining communications and reporting. In addition, they allow syndicators to send out distributions to their existing investors with a few clicks.

Investor Relations can be thought of as the backbone of the trust-building process. After a capital raiser secures an investor and establishes trust, that investor is then the responsibility of the investor relations team. Through investment reporting, answering questions, and sending regular distributions, amongst other things, trust is slowly built over time. As trust increases over time, there is a strong chance that existing investors will refer their friends and family to invest with the sponsor group. Nothing is more powerful than a referral when it comes to the investor acquisitions process since the existing investor does much of the heavy work by describing the syndicator’s service to the potential investor. Essentially, the existing investor breaks the ice between the capital raiser and the potential investor. This is critical to understand from the perspective of a sponsor and is why investor relations is so important to growing a syndication business.

Marketing

Marketing is almost self-explanatory and is a vital part of any business, not just for a real estate investment company. Marketing involves promoting a syndicator’s service through a number of different techniques with the goal in mind of acquiring leads to grow the business. Those techniques vary from company to company and include such things as writing books, publishing research, establishing meet-up events, and more. Most often you’ll see the techniques I described being presented on social media such as LinkedIn, Instagram, Facebook, BiggerPockets, and more. While we all know what marketing is, it takes a lot of work. Creating a marketing plan and being consistent takes not only time, but creativity. It’s vital that content is eye-catching, informative, and constantly being created and posted at least four to five times a week on social media. This is why you see large companies and influencers constantly posting. We live in such a fast-paced world now that if a syndicator was to stop marketing, they’ll likely be forgotten about. I don’t want to spend too much time on this topic since we all know what it is and how it relates to business. The important thing to remember is that marketing is not as simple as some people may think, it requires serious dedication and creativity.

Asset Management

Asset management in relation to real estate is the process by which someone or a team oversees properties to make sure they are operating efficiently and generating as much value as possible. Asset managers are at the core of syndication businesses because without this individual or team, the portfolio of properties the syndicator owns would likely not operate in a way that maximizes efficiency. Asset managers are responsible for a wide variety of tasks which include the following and more:

  1. Reporting and maintaining property financials: This involves recording expenses and revenue for properties within the portfolio. A few important metrics that are necessary to keep track of include effective gross income, debt service coverage ratio, internal rate of return, cash-on-cash return, and equity multiple.
  2. Managing and maintaining relationships with property managers: Not all property managers (PM) are the same and from time to time a property management company may need to be switched out for another if they are not operating a property efficiently. If the PM needs to be replaced, that is the job of the asset manager. In addition, PM reports to the asset manager who then records the financials of the property.
  3. Marketing properties: While PM usually takes care of marketing properties, sometimes this is the responsibility of the asset manager.
  4. Finding creative ways to improve property value/cash flow: The goal of an investment is to produce as much income as possible and it’s the job of the asset manager to make sure the properties they oversee are generating as much income as possible. A few creative ways to generate additional income for a property include adding on-site storage, implementing or increasing laundry income, maximizing parking revenue, etc.
  5. Conducting market research: Asset managers need to make sure they are tapped in with the market. They should be able to answer questions such as:
    • How fast are rents increasing in the market?
    • What sort of development is going on in the market?
    • How fast has the population been growing?
    • What industries dominate the market?
  6. Developing budgets for future investments: As asset managers get more familiar with a market and the properties within that market, they should get a feel for where expenses will land for any given acquisition.
  7. Making financial projections: In conjunction with the last point, asset managers need to know how to underwrite deals and confirm if a potential acquisition is a worthwhile investment.
  8. Negotiating property management agreements: Since asset managers maintain relationships with property managers, they need to know the needs and wants of PMs. As a result, they’re the best people to negotiate PM contracts.

The combination of these tasks is what allows a real estate portfolio to thrive. While an asset manager or team varies in terms of the tasks they do, the important thing to realize is that owning a portfolio of multifamily properties is not a passive investment. Educators on the internet may lead you to believe that multifamily properties can take care of themselves through the implementation of a property manager, but that is not the case. Either a team or an individual needs to be there to support the multifamily portfolio. The larger the portfolio of properties, the more people need to be responsible for overseeing the operations. In essence, asset management is the life blood of a real estate company.

Conclusion

After having described all the tasks that sponsor groups need to be on top of, you now understand the value proposition that syndicators bring to the table. With the large variety of responsibilities that syndicators hold, it’s justifiable that they charge a set of fees. That’s not to say that the fees being charged shouldn’t be scrutinized, but rather that sponsors should be compensated for all the work they put in. I hope that this post has opened your eyes and provided you a new perspective to the inner workings of a sponsor group.

If you have any questions regarding the terms and concepts in this post or previous ones, don’t hesitate to reach out to either me (tedi.nati@jpacq.com) or someone on our team so we can help explain what is causing the confusion. If you’re interested in investing with us at JP Acquisitions, you can contact us via email (contact@jpacq.com), LinkedIn, Instagram, or our investor portal to set up a meeting.

As always, I hope you enjoyed reading this post as much as I have writing it. Best of luck!

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About the Author

Tedi Nati is the Managing Partner of JP Acquisitions. In his role he is responsible for broker outreach, establishing deal flow, underwriting, marketing, and assisting in the closing process. In addition to his role at JP Acquisitions, he is an Assistant Equity Underwriter at Cinnaire, a non-profit Community Development Financial Institution (CFDI). In his role at Cinnaire, he is responsible for assisting the underwriting team in evaluating and structuring real estate equity investments and assessing the risks and mitigants associated with such. Tedi earned his Bachelor of Science in Finance from DePaul University, where he graduated Summa Cum Laude. In his free time he enjoys reading, writing for his blog (tedinvests.com), looking for multifamily deals, working out, and researching stocks.

Make sure to always do your own research before making any final decisions on buying/investing real estate, stocks, or other securities. I am not a CPA, attorney, insurance, or financial adviser and the information in this blog post shall not be construed as tax, legal, insurance, construction, engineering, health and safety, electrical or financial advice. If stocks or companies are mentioned, I sometimes have an ownership interest in them – DO NOT make buying or selling decisions based on my posts alone. If you need such advice, please contact a qualified CPA, attorney, insurance agent, contractor/electrician/engineer/etc. or financial adviser.

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