September 23, 2021
In this post, I will explain how I conceptualize the formation of a sponsorship team and how my partner and I applied these principles when forming the team for our first multifamily syndication.
To start with, every multifamily deal sponsor team must address the following roles and criteria:
When starting out in syndication, it is important to determine which of these 5 boxes you can check yourself and which will require partnering with other individuals. I also like to think about these roles in terms of the main attributes needed to satisfy them:
Let’s see how these attributes apply to each of the above roles. Then I’ll illustrate how we accounted for each role when putting together the sponsorship team for our first deal.
Before we get started, ensure that you pick the right real estate syndication software to help you raise capital and look professional in front of your investors.
Underwriting and acquisition — time, skill/ability, network, location.
A multifamily deal acquisition can be a very time-consuming process. If you are new to a market and asset class, as I was in DFW, you must initially spend a lot of time building up your network of brokers and service providers (property managers, contractors, due diligence specialists, lenders, insurance brokers, etc.).
You must research the market and individual sub-markets, source deals from brokers, underwrite the deals, perform market surveys, and submit and negotiate offers.
Once the deal is under contract, you must shepherd the deal through closing, including coordinating due diligence and ensuring your loan goes through. I won’t cover every item you must attend to from contract through closing, as that would necessitate its own post.
Obviously, you must also have the skill/ability to underwrite deals effectively and recognize what separates a bad deal from a good deal from a great deal. Like any skill, this takes time and consistent practice.
The location also comes into play here because it will be more difficult to build connections with brokers and others if you are not local to your target market. That’s not to say it’s impossible, but if you are just starting out, it makes sense for the person in the acquisition role to be local (“boots on the ground”).
In practice: Starting out as a sponsor, I had relatively little net worth and liquidity. I had just quit my job as a paralegal, which had been my career for 10+ years, and moved to Dallas to focus exclusively on multifamily syndication. I also had joined a multifamily syndication mentoring program shortly before moving to Dallas.
Additionally, I had some prior real estate experience in the form of a few single-family/duplex rentals and a 7-unit apartment building. I had never done an Agency (Fannie/Freddie) loan, and I had never raised any capital from investors. My biggest assets were living in my target market (DFW) and having plenty of time on my hands. Therefore, it made the most sense for me to focus initially on underwriting and acquisition.
Capital raising — network, skill/ability, time.
The most important factor by far in multifamily capital raising is your network of potential investors. If you have a large network of wealthy individuals eager to invest in real estate and have a high degree of trust in you, then raising capital may be relatively easy and take little time. Some syndicators with robust investor networks can raise millions of dollars in mere hours.
If you don’t already have that network, then you may need to spend the time to build it. Raising capital can also be a skill, especially for sponsors who rely heavily on marketing and advertising to a broad audience rather than cultivating a smaller network with strong connections. Finally, networking is a skill as well — something that I had to learn when I started out, as I had no prior professional networking experience.
In practice: My first partner, Perry Zheng, lives in Seattle and has a demanding full-time job. Therefore, he does not have time or location in his favor. However, he had a similar amount of real estate experience as me, and we had done a few small deals together before changing our focus to multifamily syndication.
One of his great assets is an extensive network of friends and co-workers in the tech sector, many of whom are interested in investing in real estate. Ultimately, Perry ended up raising the bulk of the capital for our first deal from this network.
Prior multifamily experience — fixed attribute.
Your prior experience is fixed at a given point in time that you can add to your syndicator bio to build credibility. You can, however, gain Agency experience by being a Key Principal (loan guarantor) on a deal, and therefore check that box for your next deal.
In practice: For the experience role, we turned to one of the mentors and coaches in our syndication program, who had an extensive multifamily track record. In addition to satisfying the Agency experience requirement, we also needed an experienced sponsor on our team to increase our credibility with brokers and have a realistic shot at winning competitive deals.
Net worth and liquidity — fixed attributes.
In practice: To meet the net worth and liquidity requirements, we brought in a few Key Principals who signed on loan as guarantors but had no further role in the deal. Some of these KPs came from Perry’s network, and some came from our syndication group.
Asset management — time, skill/ability, location
The amount of time required by asset management can vary greatly, depending on how active you want to be, the competency of your property manager, and the requirements of the specific deal. For example, a relatively turnkey deal with a good manager in place may require relatively little active oversight (e.g., not much more than bi-weekly calls and the occasional property visit).
A heavy value-add deal that requires a lot of rehab and tenant turnover, with a manager who is not on top of things, may require daily oversight. Active asset management requires considerable skill in managing budgets and people.
For a heavy value-add deal, it is also important that the asset manager be local to regularly visit the property to ensure that the business plan is executed properly and ensure that the staff and management company remain accountable. However, the location may be less important for very experienced sponsors who have a well-established relationship with their management company and have built the trust that entails.
In practice: Since I had the freest time and was already “boots on the ground,” it made sense for me to be the primary asset manager once we closed on the deal. Having never managed an asset larger than 7 units, it was certainly a big jump going straight to 172 units.
Given our relative lack of experience, hiring a top-notch property management company was one of the most important decisions. However, even the best property manager needs oversight and guidance since they don’t always approach operations from an investor’s perspective. In addition, asset management is a huge field, and I am constantly learning, researching, and implementing new information.
I hope this framework helps prospective sponsors better understand what they bring to the table and what pieces they are missing. An effective sponsorship group is synergistic, with each role complementing the others.