Understanding Real Estate Sponsor Responsibilities
Acquiring and managing a commercial real estate asset require a lot of work: reviewing many deals to find the right one, conducting due diligence, putting a deal together, securing and negotiating financing sources, overseeing leasing, maintenance, and renovation construction, managing the asset throughout its life cycle, and producing a favorable outcome for all investors. All this work is done by sponsors with experience. Sponsors, also called the General Partners (GPs) play an active role on behalf of all the equity investors in a project. Sponsors also sign on the lender note and have significant liability exposure on them. The other passive investors are usually called Limited Partners (LPs), and their liability in the project is limited only to their investment.
We review some of the responsibilities that are performed by sponsors below. Good sponsors have an experienced team to manage all these responsibilities.
Acquisition
The acquisition of a property involves finding and evaluating several potential assets to find the right one. Sponsors underwrite the deal to ensure the funding and returns will work for their investors. They typically have to pursue several potential real estate properties, thus incurring costs. The sponsors also conduct a thorough due diligence prior to acquisition.
Property Management
Sponsors may outsource this function or do their own in-house property management. The work requires having property management staff on site, who is in charge of day-to-day operations, maintenance, leasing, and upkeep of a building or property. The property management staff salaries, office space, equipment, computer hardware, software and maintenance costs are also incurred.
Construction Management
Sponsors also manage construction when there is renovation or construction as part of the plan. The sponsors do all the project management and work with general contractor to determine the scope of work, obtain and negotiate bids, hire and manage contractors, make all the key decisions regarding construction, inspect progress on-site, and approve completion.
Development
Development responsibilities typically apply only to a ground-up project involving many pre-construction steps, such as environmental testing, securing zoning, obtaining building approvals and permits from the county, hiring architects, engineers and contractors to design and complete the work. A project sponsor may also hire a third-party developer to manage the development process.
Asset Management
The asset management responsibility involves general investment management. While the property manager executes the day-to-day operations at the property level, the asset manager oversees and makes decisions regarding the asset, such as choosing and overseeing the property manager, making key decisions on leasing, managing cash flows for capital expenditures and ongoing costs, determining and adjusting the strategy to improve asset value, analyzing market conditions, reviewing and approving key expenditures, creating monthly accounting reports, distributing dividends to investors, managing lenders and providing ongoing reports, and making decisions on when to sell or refinance.