Investors looking to deploy capital into commercial real estate assets have a variety of options for doing so. For example, they could purchase and manage a property directly. Or, they could partner with an experienced sponsor who will take on the responsibility of finding, acquiring, financing, and managing a property on their behalf. While the latter scenario can be incredibly beneficial for many investors, it also presents the challenging task of trying to decide which firm or sponsor to partner with.
Commercial real estate is a highly specialized industry and it can take many years of experience and dozens of transaction repetitions to gain the knowledge needed to create the consistent returns that investors demand. Firms with an established track record of stable returns are the gold standard and there are seven things that investors should look for to identify them.
Seven Things Investors Should Look for In Their Commercial Real Estate Sponsors
The commercial real estate sponsors that deliver a combination of strong investment returns with a positive customer experience tend to have seven things in common.
# 1 – Communication
When a sponsor accepts investment capital from an individual, they are implicitly agreeing to provide periodic updates on the investment’s performance. The best sponsors communicate clearly and consistently.
Before the transaction occurs, the sponsor should be clear about the potential risks in the transaction, the anticipated timeline, the business plan, sponsor fees, and the assumptions used to underwrite the property. While the ultimate investment decision is up to the individual, it is the sponsor’s responsibility to make sure investors have the information needed to make the most informed decision possible.
Once the transaction has been closed, the sponsor has a responsibility to keep investors informed about the progress of their investment. This can happen through periodic email updates that include pictures of recent renovations, budget vs. actual reports, and descriptions of potential risks that could impact the property. Strong communicators also make themselves available to answer any questions that investors may have.
#2 – Suitability Review
Every individual’s financial situation is unique. An investment may be a very good fit for one individual and a poor fit for another. The best commercial real estate sponsors take the time to get to know their investors and to understand their financial goals. Then, they use this information to make tailored investment recommendations that fit the individual’s risk tolerance, time horizon, and return objectives.
For example, one investor may have a significant amount of investable assets and a very long term time horizon. If this is the case, they may be a better fit for a speculative investment that has high risk / high reward potential. Conversely, a speculative investment is likely a poor fit for an individual with a much smaller investable portfolio and a shorter time horizon.
#3 – Diversification / Deal Flow
Because each investor’s risk tolerance, time horizon, and return objectives are unique, the best commercial real estate sponsors offer a variety of strategies and investment types so there is something for everyone. For example, sponsors should offer a number of “core” investment opportunities for the individuals who are risk averse and prioritize protection of their capital. But, they should also offer a (smaller) number of speculative opportunities for those who can afford to take more risk.
To be in a position to offer a variety of investment options, it is imperative that commercial real estate sponsors have access to strong deal flow. This means that they should have a significant network of commercial real estate brokers, bankers, owners, and tenants who are willing to refer opportunities when appropriate. It can take years to build this network, but the investment can pay off in the form of prioritized access to the strongest deals.
#5 – Proactive Tax Reduction Strategies
For an individual, one of the primary benefits of a commercial real estate investment is its favorable tax treatment. The best sponsors have a thorough understanding of the tax rules that govern a commercial real estate transaction and they proactively seek to maximize the benefit from them.
For example, we commonly employ a tax reduction strategy called cost segregation. With it, we hire an independent firm to review the components of a property and “segregate” them into buckets. Depending on the component type, its depreciation of it can be accelerated, which serves to reduce a property’s tax liability. The savings is passed through to our investors.
#6 – Local Market Knowledge
A commercial property’s location is a significant predictor of its success. As such, the strongest commercial real estate sponsors spend a significant amount of time researching both the market and sub-market of potential investment targets. In doing so, they seek to understand the trends surrounding key drivers of property value in the local market like: job growth, median income, population growth, average rental rates, average vacancy rates, average cap rates, traffic counts, and planned development projects.
In our case, the final thing we do before making an offer is to perform a site visit to speak with tenants and customers about their opinion of the property. In addition, we note potentially needed renovations, areas of ingress/egress, traffic counts and overall property condition. Finally, we drive the entire market to get a feel for the surrounding area and potential competitors. We view this as an imperative before making a final investment decision.
#7 – Cash Flowing Investments
Finally, and it should go without saying, the best commercial real estate sponsors offer deals with positive cash flow and the potential to grow it further. This means that, after a property’s operating expenses and loan payments are made, there is money left over to be distributed to investors. And, there is an opportunity to actively manage the property to increase the amount of cash available for distribution over the life of the investment.
For example, we prefer to manage our portfolio properties in house. We have a team of world class asset managers and we believe that we can do it better and less expensively than a third party vendor. So when we purchase a property, one of the things that we like to do is to bring the management function in house. This cost savings is passed on to our investors in the form of increased cash available for distribution.
Interested in Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. We leverage our decades of expertise and our available liquidity to find world-class, multi-tenanted assets below intrinsic value. In doing so, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you are an Accredited Investor and would like to learn more about our investment opportunities or how we measure up to the dimensions described above, contact us at (800) 605-4966 or firstname.lastname@example.org for more information.