3 Things You Need to Know About Deal Sponsors in Multifamily Real Estate Syndications

Have you ever come across the term “deal sponsor”?

If you’re looking to passively invest in multifamily real estate, you most probably have.

Who is a deal sponsor anyway?

In this article, I’m going to walk you through three questions — three things you need to know — about deal sponsors in multifamily real estate syndications — who they are, what they do, and how they get paid. So let’s get right into it.

1. Who Are They?

Deal sponsors are the people behind the entire deal. They are in charge. They can be individuals, a company, or a group of people — it doesn’t really matter even if you sometimes hear the term “sponsor” used in a singular form. They call the shots. They are in complete control of the deal.

In syndications, we have two sides: we have the GP (the general partnership) and the LP (limited partnership). The sponsor is the GP. They are in charge of the syndication. The LP are the passive investors who are bringing capital into the deal. Then their capital is put to work by the GP. They can then go out and acquire a piece of real estate.

That’s how the GP-LP works. So when it comes to deal sponsorship, these people (the GP) are going to be signing on all the loans, mortgages, and all the documents. Everything stops — yes, “the buck stops” so to speak — with the GP, the deal sponsor.

2. What Do They Do?

So we know that they’re in charge of the entire process — they’re calling all the shots. But what does that entail?

First of all, they’ll be finding the deal. They’ll be underwriting the deal, making sure it’s a good investment opportunity. They’ll be doing all the offering and the contractual stuff, so they’ll be presenting contracts. They’ll be presenting their letters of intent (LOIs), negotiating the deal, putting all the right terms in there.

Next, they’ll be doing due diligence. So they’ll be doing all the inspections and walkthroughs, making sure that all the accounting is right and the tenants are paying what the current seller claims they’re paying.

Then, they’ll actually raise the capital. So they need to go out to the LPs (limited partners) and raise the money for the deal, prepare all the marketing packages for the investment opportunity and all the paperwork including PPMs (Private Placement Memorandum). They have to structure it the right way.

They then close on the deal. Once they close on the deal, the hard work starts happening because we immediately implement the value-add strategy. Here are some questions that need to be asked and decided upon:

1. What are we going to do with rents, marketing, branding, operations?
2. Are we going to raise the rents up? Are we going to keep them flat?
3. Are we going to offer any incentives?
4. How are we going to lease up the property?
5. Are we going to deal with vacancy — economic or people not paying rent on time?
6. What can we put into play to deal with these two kinds of vacancy?
7. What additional income streams can we find to boost NOI to increase property value?
8. When do we refinance if we refinance?
9. When do we put additional debt on the property?
10. When do we sell if we sell?

All these questions come back to the deal sponsor since they’re in charge of everything.

3. How Do They Get Paid?

Deal sponsors get paid in two different ways — through fees and through splits.

A. Fees

Deal sponsors (the general partnership) will collect fees. It could be an acquisition fee. That’s to recoup the deal-hunting costs. Upon closing of the property, they will earn a fee. There could also be construction management fees if there’s a construction component to that project. There could be asset management fees.

Actually, there are many different kinds of fees. It just depends on the type of deal. So it’s a case-by-case basis. Each sponsor will be different in the types of fees that they charge.

But fees aren’t directly tied to the performance of the deal. So as a potential passive investor and limited partner, you want to make sure that the general partnership, the deal sponsor, is being rewarded for doing good work. That means when you make money, they should also make money. But if you’re not making any money, they should not be making any money. So it’s all about incentivizing people in the right way. This is where splits come in.

B. Splits

You’ll see many different splits depending on the type of project and the general partnership. You can have 60/40, 80/20, 70/30, or 75/25 — you name it. But again, it all depends on the sponsor, the type of deal, and all that stuff. What this means is that this is the split in favor of the LP. So in a 60/40 split, 60 percent of the profits would go to the limited partnership and 40 percent would go to the deal sponsor — the person, people, or company running the deal.

Splits apply to cash flow. So these are your monthly or quarterly distributions. And then upon the sale of the property, as well as if there’s a refinance, adding more debt to the property, these all come into play. So again, how do deal sponsors get paid? Through fees and splits.