Back to All Posts

How Do Investors Evaluate Real Estate Sponsors?

Investors have many options when considering allocating a portion of their overall investment portfolio to commercial real estate. Offerings can vary significantly by investment strategy, target geographies, asset classes and risk profiles. Commercial real estate opportunities are also accessible through marketplaces, allocators and directly through sponsors themselves. The sponsor, often known as the general partner or GP, is the organization or group of individuals responsible for raising capital, acquiring real estate projects, maximizing value and returning any profits to investors. For all potential opportunities, one of the most important questions to ask is: how does an investor evaluate the strength of an investment’s sponsor? This article will outline some of the key factors to consider when evaluating sponsors.

Sponsor Hands on Management

How to conduct due diligence on an investment opportunity and its sponsor?

Investors are often focused on the investment thesis: what is the investment strategy, where and in what asset classes. The specific approach will differ for each individual investor’s goals, financial position, and risk tolerance. An equally important question is: how to evaluate the team managing the real estate itself. The list of questions below may help guide potential investors on some of the questions to investigate before proceeding with a commercial real estate investment.

  • What is the experience of the sponsor’s key executives? Review biographies and understand their tenure in the industry and with the sponsor.
  • How long has the sponsor been active in the commercial real estate industry, and what is its overall reputation?
  • How many previous investment programs has the sponsor managed and across what types of strategies?
  • How have previous investment programs performed? Review any prior performance information, keeping in mind that prior performance is not a guarantee of future results.
  • What is the financial strength of the sponsor, and how may the sponsor be impacted in the event of an economic downturn?
  • What specific expertise does this sponsor have that provides a potential competitive advantage?
  • Does the sponsor operate the properties itself (including management, leasing, marketing and design)? Or does it outsource these functions to third parties?
  • What are relationships with lenders that can help obtain favorable financing terms?
  • What level of local market expertise and relationships does the sponsor have in its key markets?
  • What is the level of transparency and communication between investors and the sponsor’s employees?
  • What are the fees and reimbursements, and are they generally consistent with rates for other comparable investments? Does the sponsor utilize affiliates, and what is the compensation structure?
  • What is feedback from investors who have experience investing with the sponsor ?
  • What is the sponsor’s commitment to environmental, social and governance practices?
  • Is the sponsor a good corporate citizen focused on promoting the well-being of local communities where it operates?
  • How has the sponsor adopted diversity, equity and inclusion principles?
  • Is the sponsor an allocator who invests in third-party real estate or an operator who controls and manages real estate itself?
  • Is the investment opportunity accessed through a marketplace or directly through the sponsor?
  • What level of co-investment has the sponsor made alongside investors to promote alignment of interests with “skin in the game”?

What are the potential risks of investing with untested or inexperienced sponsors?

The Latin phrase “caveat emptor” – or “let the buyer beware” – is one potential risk that investors should keep in mind as they evaluate investment opportunities, particularly in the world of online marketing where some may engage in aggressive marketing campaigns. If marketing materials suggest quick returns without highlighting potential risks, this can be a red flag. Additional investor due diligence with research on the management team and review of the offering materials may provide a more complete picture to help guide the investment decision.

Rubble

What are the potential risks of investing through a marketplace, allocator, or directly with a sponsor?

In addition to evaluating the sponsor itself, individuals should consider the potential benefits and risks of investing through a marketplace or allocator. A marketplace may feature a number of investment opportunities from different real estate sponsors. An allocator may raise funds into a pooled investment vehicle and then invest the funds into real estate owned and operated by a third party.

Investing through a marketplace may have the benefit of being able to diversify investments across several different opportunities. This can be helpful for investors who want to handpick a number of investments featured on one platform. Typically, however, investors do not maintain a direct line of communication with the sponsor and instead will communicate through the marketplace platform. This may create challenges if investors want to maintain a direct point of contact with the sponsor to understand the progress of the investment or have questions about reporting and tax documentation.

Allocators also raise funds for third-party investments. As compared with marketplaces, allocators typically raise dollars into an investment vehicle such as a discretionary fund which the allocator will then invest into real estate owned by third parties. These opportunities may provide some level of diversification across different projects and sponsors. However, it’s difficult to understand the strength of the sponsorship since investment dollars may be spread across many sponsors, and blind-pool discretionary funds do not provide the same level of upfront transparency as direct investments. In this model, investors rely on the allocator to decide on which sponsors are suitable partners.

The sponsor, frequently referred to as the general partner or GP, is the organization or group of individuals responsible for acquiring real estate projects, maximizing value and returning any investors' profits. A sponsor might also be responsible for aggregating capital and guaranteeing the loan documents. The GP typically issues ongoing distributions payments directly to investors as per the terms outlined in the operating partnership agreement and provides 1099s or K-1s to investors during tax season. While there are many benefits to investing directly with a sponsor, there also risks. For example, a sponsor may not be able to execute the business plan or have a seasoned management team in place. Additionally, perhaps the sponsor underestimated the cost of renovation. If so, are the investment partners well-capitalized to see the project come to fruition?

What is a sponsor co-investment and how can this help mitigate potential risks?

In a typical commercial real estate investment, the sponsor (general partner) will actively control decision-making and manage the day-to-day operations of the properties while the investors (limited partners) contribute capital and maintain a passive role to share in future net cash flows. One important question for investors to ask is: how much has the sponsor invested in this opportunity?

If the co-investment is small or none (generally the case with many online syndication platforms setting up a special purpose vehicle to invest alongside of other limited partners), the sponsor may not be as incentivized to focus on maximizing the value of the investment. These sponsors are investing other people’s money and may benefit from fees but not share in the downside risk if the investment does not perform according to plan. If the co-investment amount is more significant, then the sponsor has “skin in the game” to deliver results that can benefit both the general partner and the limited partners. Larger co-investments may also signify that the sponsor is a well-capitalized entity that can “put its money where its mouth is” by placing its own capital at risk alongside investors.

Often, senior management employees of the sponsor may participate in co-investments, further aligning the interest between key decision-makers managing the properties and the investors.

Office

How to invest directly with a stable and well-capitalized sponsor who has decades of experience navigating financial cycles?

Evaluating an investment opportunity’s sponsor is one of the most important steps in selecting alternative investments. While commercial real estate can be a high-risk asset class, investing alongside a strong and experienced sponsor can mitigate some of the risks and provide the potential for wealth creation. In addition, investing directly with a sponsor may promote a greater level of transparency in and allow a direct communication line as compared with investing through a marketplace or allocator investing funds in projects owned and managed by third parties. Investing directly with top-tier sponsors is now more accessible than ever with recent regulatory reforms and the advent of digital investment platforms.

In Jamestown’s more than 37-year history, the company has invested on behalf of more than 80,000 individual and institutional investors across 31 funds with total assets under management of $12.1 billion as of December 31, 2020. Jamestown Invest is the first direct-to-consumer platform launched by a global real estate institution. Our ownership is privately held, well-capitalized, and participates alongside investors with significant co-investments. This approach promotes alignment of interest since Jamestown and its senior employees have “skin in the game” at the same terms as investors. For those who are considering the Jamestown Invest 1, LLC fund, the offering circular details additional information about Jamestown’s capabilities and experience.

Investing in Jamestown Invest 1, LLC’s common shares is speculative and involves substantial risks. The “Risk Factors” section of the offering circular contains a detailed discussion of risks that should be considered before you invest. These risks include, but are not limited to, illiquidity, complete loss of invested capital, limited operating history, conflicts of interest, blind pool risk, and any public health emergency. In addition to the foregoing risks, the adverse economic effects of the COVID-19 pandemic are unknown and could materially impact this investment. Further, there is no assurance that Jamestown Invest 1, LLC will be able to achieve its investment objectives or to access targeted investments like those identified.

JW thumbnail min 1

By John Wilson
Fund Manager

Join hundreds of our investors, building a well-balanced portfolio with commercial real estate.
By submitting this form, you agree to the Jamestown Privacy Policy and Terms of Use and that you are a U.S. citizen and resident.

*Required

Disclaimer

Educational Communication

The views expressed above are presented only for educational and informational purposes and are subject to change in the future. No specific securities or services are being promoted or offered herein.

Not Advice
This communication is not to be construed as investment, tax, or legal advice in relation to the relevant subject matter; investors must seek their own legal or other professional advice.

Performance Not Guaranteed
Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections are not guaranteed and may not reflect actual future performance.

Risk of Loss
All securities involve a high degree of risk and may result in partial or total loss of your investment.

Liquidity Not Guaranteed
Because of the illiquid nature of our shares, you should purchase our shares only as a long-term investment and be prepared to hold them for an indefinite period of time.

Investing in Jamestown Invest 1, LLC’s common shares is speculative and involves substantial risks. The “Risk Factors” section of the offering circular contains a detailed discussion of risks that should be considered before you invest. These risks include, but are not limited to, illiquidity, complete loss of invested capital, limited operating history, conflicts of interest, blind pool risk, and any public health emergency. In addition to the foregoing risks, the adverse economic effects of the COVID-19 pandemic are unknown and could materially impact this investment. Further, there is no assurance that Jamestown Invest 1, LLC will be able to achieve its investment objectives or to access targeted investments like those identified. Jamestown Invest 1, LLC is offered through North Capital Private Securities, member FINRA/SIPC.

Information on and photography featuring Jamestown’s current and previous portfolio of projects and properties are not representative of Jamestown Invest 1, LLC’s investment strategy and are not representative of the scale of investments that Jamestown Invest 1, LLC intends to make. Further, there is no assurance that Jamestown Invest, 1 LLC will be able to achieve its investment objectives or to access investments like those identified. Prior performance is not indicative of future results.

Jamestown makes no representations, express or implied, regarding the accuracy or completeness of this information, and the reader accepts all risks in relying on the above information for any purpose whatsoever. Any actual transactions described herein are for illustrative purposes only and, unless otherwise stated in the presentation, are presented as of underwriting and may not be indicative of actual performance. Transactions presented may have been selected based on a number of factors such as asset type, geography, or transaction date, among others. Certain information presented or relied upon in this presentation may have been obtained from third-party sources believed to be reliable, however, we do not guarantee the accuracy, completeness or fairness of the information presented.


The NPI is a quarterly, composite total return for private commercial real estate properties located in the United States. The NPI includes operating office, retail, industrial, apartment, or hotel properties accounted for on a market value basis and includes the impact of leverage employed on the properties in the index. The NPI Levered Index is illustrative of historical average annualized commercial real estate returns on a gross property level leveraged basis, and these historical returns may not be indicative of future results. Leverage adds additional risks because leverage providers generally get paid first and may have a full or partial recourse claim against a portfolio. Such real estate return data should not be used to estimate returns of Jamestown Invest investments. While Jamestown Invest 1, LLC may acquire properties that meet some of the NPI criteria, it may acquire properties that do not meet such criteria. Further, Jamestown Invest property returns may have a better or worse average annualized return performance compared to the index as each real estate investment is unique in nature, which is inherently problematic for benchmarking to the composite returns of a highly diversified index.