How to Evaluate Real Estate Syndication Sponsors

When it comes to passive investing in real estate, choosing the right syndication sponsor can make or break your investment. A syndication sponsor, also known as the General Partner (GP) or operator, is responsible for finding, acquiring, financing, managing, and ultimately selling the property, making this role crucial to the success of the investment. 

This guide will walk you through the essential steps to vetting a real estate syndication sponsor, ensuring that you make informed, confident investment decisions.

Who Are the Main Players in a Syndication, and Why Does It Work?

In a syndication, there are generally two main roles: the General Partner (GP) and the Limited Partners (LPs). The GP manages the project, and the LPs provide the capital. This structure leverages the strengths of both parties: the GP’s expertise and the LP’s financial resources.

While the terms “sponsor,” “GP,” and “operator” are often used interchangeably, they can have slight nuances, depending on the context. 

The sponsor is usually the individual or entity that initiates the syndication, finding and organizing the investment opportunity. The General Partner (GP) is the legal entity responsible for the management and operations of the syndication. The operator often refers to the team or individual managing the day-to-day operations of the property. 

For the purposes of this article, we will focus on the team actually performing the day-to-day duties of running the investment—not just raising the capital.

General Partner (GP)

• Role: The GP, or sponsor, is responsible for the overall management of the syndication. They find the investment property, secure financing, manage the asset, and eventually sell it. The GP often invests some of their own capital in the deal alongside the LPs.
• Skills: Successful GPs have strong market knowledge, a network of industry contacts, and experience in managing similar assets. They also need to be effective communicators, providing regular updates and addressing investor concerns.

Limited Partners (LPs)

• Role: LPs are passive investors who provide the bulk of the capital required for the investment. In return, they receive a share of the profits generated by the property. LPs do not participate in day-to-day management of the property, but rely on the GP’s efforts and expertise.
• Benefits: LPs benefit from access to larger, potentially more lucrative investments than they could manage individually. They also gain exposure to the real estate market without the need to source properties, obtain loans, and handle the operational aspects of property management.

How to Vet an Operator/GP

Evaluating a syndication sponsor requires a structured approach to ensure you’re partnering with a capable and trustworthy operator. Here’s my three-step process to streamline your screening:

1. Pre-call vetting stage

• Create a List of Potential Sponsors: Start by gathering names of sponsors from various sources, such as other investors, real estate conferences, investment groups, or online searches. Consider joining real estate investment forums, attending networking events, and subscribing to industry newsletters to build your list.
• Review Sponsor Websites: Examine their websites to understand their business model, track record, and investment strategies. Look for alignment with your investment goals and values.
• Set Up Initial Calls: Schedule calls with potential sponsors to begin your evaluation process. This initial conversation is crucial to gain insights into their operations and philosophy.

2. Vetting call stage

Prepare a list of questions to ask during your scheduled call with an operator. These questions are designed to help you understand if your goals, risk tolerance, and timeline are aligned with those of the operator. 

Alignment with the operator is where most passive real estate investors go massively wrong in their investing. They think it all has to do with the deal, but really it is all about the operator. A good operator can make the best of a bad situation, and a bad operator can screw up a perfectly good real estate deal.

• Experience and Track Record: How many syndications have they completed? Have they taken deals full cycle? Look for evidence of their ability to manage properties effectively and deliver returns to investors.
• Relevant Experience: Do they have experience in the type of asset to be acquired, as well as in the geographical area where the asset will be acquired?
• Investment Strategy: What is their typical approach? Are they focused on cash flow, forced equity, or long-term holds? Understanding their strategy helps ensure it aligns with your risk tolerance and investment goals. While you are on this topic, do they have experience successfully employing this strategy?
• Team Composition: Who are the key players on their team, and what is the structure, roles, and responsibilities? Do the partners use any consultants or outside vendors to fill critical roles like underwriting, property management, tax, legal? A strong team with complementary skills is vital for successful property management and problem-solving.
• Risk Management: What are the major risks of their investment strategy, and how do they mitigate them? Sponsors should have a clear plan for dealing with market downturns, vacancies, and other potential issues.
• Lending Plan: What types of lending strategies do the operator like to use for acquisition (i.e., fixed-rate debt, adjustable rates with rate caps)? Is it recourse or non-recourse lending? 
• Lending Sponsorship: Lenders will require the GP to fulfill specific experience, net worth, and liquidity requirements. Who at the sponsor’s firm has these things? Or are they “hiring this out” by throwing a piece of their fees to an outside party to sign on the loan covenants? The answer will say a lot about who has a lot at stake if the deal goes south.
• Communication Plan: How do they communicate with investors? What is their plan for providing updates and K-1s? Regular, transparent communication is crucial for maintaining trust and keeping investors informed. Ask for samples of recent quarterly reports for their other active deals so you can see what you can expect to receive once the investment has been made.
• Handling Challenges: Have they experienced any significant issues with previous deals, and how were those handled? If issues have occurred, how did the proposed business plan change? You want an operator who has seen a lot and is resourceful, nimble, and has persevered. Their ability to navigate challenges can provide insight into their problem-solving skills and resilience.
• Assessing Character and Competency: Do they seem genuine, authentic, transparent, and honest? Assess their demeanor and willingness to answer your questions thoroughly. Trustworthiness is paramount in a sponsor. Pay attention to your gut response here.

3. Post-call vetting stage

• Review Post-Call Information: Revisit notes from your call and any materials provided. Consider any follow-up questions you might have. Reflect on their answers, and assess if they align with your expectations and values.
• Seek Feedback From Other Investors: Reach out to other investors who have invested with the sponsor. Their experiences can provide valuable insights into the sponsor’s reliability and performance. Ask about their satisfaction with returns, communication, and how the sponsor handled any issues encountered during the investment.
• Schedule Additional Calls if Necessary: If you have unresolved questions, don’t hesitate to arrange further discussions. A good sponsor will be willing to address all your concerns. If not, this should automatically disqualify them.
• Follow-Up: Pay attention to the follow-up from the operator. Does the operator send information and documentation in a timely manner? Do they do what they say they are going to do? How they do one thing—like follow up—is how they will do everything when you are in business with them.

4. Decision stage

• Make Your Choice: After completing your due diligence, decide whether to delete, defer, or engage with the sponsor. If you choose to engage, request referrals to further validate your decision. This final step ensures you are making an informed choice, backed by multiple perspectives.

What Are the Eight Red Flags to Pay Attention To?

Now that you have a great process in place to gather data on your operators, what are the top red flags you should be looking out for? Identifying red flags early can save you from financial losses and headaches. 

Here are some red flags to incorporate into your operator underwriting:

1. No Successful Background in Business: A sponsor must have a successful business background and be able to manage assets during tough times. They should demonstrate skills in managing people, systems, and KPIs.
2. A Part-Time Operator: Syndication is a full-time commitment. Avoid operators who treat it as a side gig. Your investments deserve full-time attention.
3. Only One Managing Partner: Having at least two unrelated partners reduces risk. Single-partner operations are riskier and can lead to issues if the operator disappears.
4. No Preferred Return or Preferred Return with GP Catch-Up: Deals should offer preferred returns to limited partners without a GP catch-up provision. 
5. Modeling a Refinance in Return Projections: Avoid deals relying on a refinance for returns. A refinance should be a bonus, not a necessity for success.
6. Distributions as Return of Capital: Distributions should be return on capital, not return of capital. Misclassification benefits the operator and impacts your preferred returns.
7. No Skin in the Game From Operator: Operators have less at stake if their principals are not signing on the loan guarantees, are making no cash investment into the deal alongside investors, and don’t have a brand/reputation that is well known in the industry. 
8. Floating-Rate Loans With No Interest Rate Caps: Avoid operators using floating-rate loans without interest rate caps. This can lead to unmanageable debt service and capital calls. Always ask if a floating-rate loan has an interest rate cap to mitigate risk.

Final Thoughts

While passive investing can yield substantial rewards, it requires active due diligence. The key to success lies in your ability to vet these sponsors effectively. By following the outlined steps—pre-call vetting, thorough interviews, post-call evaluations, and final decision-making—you can make informed choices that align with your financial goals and risk tolerance.