Sponsors Underwriting Steps. 10 Questions to ask on the first call

Multi-Family and Apartment Investing
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Sponsors Underwriting Steps. 10 Questions to ask on the first call

Mikhail Pritsker
Member since 2024 · 10 posts · 8 votes

Hello everyone!!

Today, I want to discuss the importance of the Sponsor Underwriting Process. Part I.

Introduction

Sponsor underwriting is a critical aspect of real estate and investment analysis. It involves evaluating a sponsor's capabilities, track record, and financial stability to ensure they can effectively manage and execute a project. This post will explore the sponsor underwriting process, utilizing a structured and practical approach for assessing potential sponsors.

Sponsor Screening Process

The sponsor screening process can be divided into several key steps, each crucial for a thorough evaluation. The following steps outline a practical approach to sponsor underwriting:

Sourcing of the Sponsor

Identify potential sponsors through various channels such as websites, referrals, and industry events (There are about 6,000 Funds and Sponsors in the USA). This step involves casting a wide net to gather a diverse pool of potential sponsors. Online platforms, industry conferences, and networking events are excellent sources for discovering new sponsors. Utilizing referrals from trusted industry contacts can also provide reliable leads. The goal is to compile a comprehensive list of candidates who meet the initial criteria for further evaluation.

Analysis of Public Information

Review publicly available information, including the sponsor’s website, marketing materials, and any available financial reports. This step focuses on gathering and analyzing information that is readily accessible. Sponsors often provide extensive website information, including their mission, vision, portfolio, and testimonials. Analyzing marketing materials can offer insights into their branding and market positioning. Financial reports, if available, provide a snapshot of their financial health. This initial analysis helps filter out sponsors who do not meet basic qualifications.

Initial Contact and Information Request

Contact the sponsor for additional information and clarification on their projects, team, and track record. Establishing direct contact with the sponsor is crucial for obtaining detailed and specific information. This step involves sending formal information requests and setting up meetings or calls to discuss the sponsor's capabilities. Ask targeted questions about their experience, project management processes, and critical team members. This interaction also allows one to gauge the sponsor's communication skills and professionalism.

10 Questions for the First Call

1) What's the Sponsor's investment thesis?

2) What's the track record? When did they start it? When did Partners start the RE business? Years of experience? Tenure together?

3) Internal vs External (In-house service teams vs Outsourcing: AM, PM, IR, Back office, Operations)

4) Does the Sponsor prefer a single market? A group of markets?

5) Internal vs External (In-house service teams vs Outsourcing: AM, PM, IR, Back office, Operations)

6) How did you handle difficult situations in business? Unforeseen problems?

7) What makes you unique as a Sponsor?

8) What's the Strategy for the next 5 years? (capital raising plans, including new funds, strategies or business lines)

9) What's your pipeline for the next 3-12 months?

10) Please provide an example of the Quarterly Report, Financial Model (underwriting), and the current deck of the Firm.

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  • Arn CenedellaPro Member
    Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes
    2y

    @Mikhail Pritsker

    Nice lost to start the conversation and LP due diligence.

    Thank you,

    Arn

    [email protected]650-575-6114
    0Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y
    Quote from @Mikhail Pritsker:

    Hello everyone!!

    Today, I want to discuss the importance of the Sponsor Underwriting Process. Part I.

    Introduction

    Sponsor underwriting is a critical aspect of real estate and investment analysis. It involves evaluating a sponsor's capabilities, track record, and financial stability to ensure they can effectively manage and execute a project. This post will explore the sponsor underwriting process, utilizing a structured and practical approach for assessing potential sponsors.

    Sponsor Screening Process

    The sponsor screening process can be divided into several key steps, each crucial for a thorough evaluation. The following steps outline a practical approach to sponsor underwriting:

    Sourcing of the Sponsor

    Identify potential sponsors through various channels such as websites, referrals, and industry events (There are about 6,000 Funds and Sponsors in the USA). This step involves casting a wide net to gather a diverse pool of potential sponsors. Online platforms, industry conferences, and networking events are excellent sources for discovering new sponsors. Utilizing referrals from trusted industry contacts can also provide reliable leads. The goal is to compile a comprehensive list of candidates who meet the initial criteria for further evaluation.

    Analysis of Public Information

    Review publicly available information, including the sponsor’s website, marketing materials, and any available financial reports. This step focuses on gathering and analyzing information that is readily accessible. Sponsors often provide extensive website information, including their mission, vision, portfolio, and testimonials. Analyzing marketing materials can offer insights into their branding and market positioning. Financial reports, if available, provide a snapshot of their financial health. This initial analysis helps filter out sponsors who do not meet basic qualifications.

    Initial Contact and Information Request

    Contact the sponsor for additional information and clarification on their projects, team, and track record. Establishing direct contact with the sponsor is crucial for obtaining detailed and specific information. This step involves sending formal information requests and setting up meetings or calls to discuss the sponsor's capabilities. Ask targeted questions about their experience, project management processes, and critical team members. This interaction also allows one to gauge the sponsor's communication skills and professionalism.

    10 Questions for the First Call

    1) What's the Sponsor's investment thesis?

    2) What's the track record? When did they start it? When did Partners start the RE business? Years of experience? Tenure together?

    3) Internal vs External (In-house service teams vs Outsourcing: AM, PM, IR, Back office, Operations)

    4) Does the Sponsor prefer a single market? A group of markets?

    5) Internal vs External (In-house service teams vs Outsourcing: AM, PM, IR, Back office, Operations)

    6) How did you handle difficult situations in business? Unforeseen problems?

    7) What makes you unique as a Sponsor?

    8) What's the Strategy for the next 5 years? (capital raising plans, including new funds, strategies or business lines)

    9) What's your pipeline for the next 3-12 months?

    10) Please provide an example of the Quarterly Report, Financial Model (underwriting), and the current deck of the Firm.


     With the way things are going now, first question I would ask is are you providing audited financial statements and who is your auditor. I would not invest in an offering that does not provide audited financials as its clear with a lot of these inexperienced guru syndicators that they lack financial acumen and proper processes.

    7e investments53 Reviews
    WebsiteView Page
    0Reply
  • Mikhail Pritsker
    OP
    Member since 2024 · 10 posts · 8 votes
    2y

    I agree. Informational control is not only about audits. It's also about your ability to access the Sponsor's financial and managerial documents on the go so you can control and check what is happening regularly. The question is—do you have enough weight in your money-raising capacity so the Sponsor would agree to provide you with all that? In my practice, they tend not to give it to everyone. 

    0Reply
  • Gino BarbaroPro Member
    Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
    2y

    @Mikhail Pritsker

    Thanks for sharing. This is great!

    Gino

    Podcast Guest on Show The “Conveyor Belt” System That’ll Build You a BIG Rental Portfolio Quickly
    0Reply
  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    2y

    @Mikhail Pritsker, and I would add, talk to a lot of sponsors.  I know that is tangential to your post, but there are pros and cons to just about all of these questions, and each sponsor will spin their answer to why it is better.

    I.e. track record: "we have an 7 yr track record, having sold 26 deals and averaging 28% net IRR to our LPs" vs "we have been in business 24 yrs averaging an 18% net IRR to our LPs, including 4 deals that lost money". Which one is better?

    Or internally managed: I generally view in-house control as better, but internal PM and construction management work best at scale.  As such, is the sponsor going to sell a deal into the free market and lose the added efficiencies on their PM side, or do they hold longer (potentially at the detriment of the LPs) to continue to help build scale?  Or, does in-house PM charge 4% versus market of 2.5-3%?

    0Reply
  • Mikhail Pritsker
    OP
    Member since 2024 · 10 posts · 8 votes
    2y

    Evan, you bring up a great point that often gets overlooked. The truth is that any data or track record can be interpreted in multiple ways, and each sponsor will naturally present their results in the best possible light. It's not just about collecting data; it's about how that data is interpreted and what it means in the broader context of your investment strategy.

    For example, a 7-year track record with a 28% net IRR sounds impressive, but it's worth considering how much of that success is due to market timing versus the sponsor's skill. On the other hand, a 24-year history with an 18% net IRR that includes some losses may indicate a more seasoned sponsor who has navigated multiple market cycles and learned valuable lessons along the way.

    Regarding internally managed operations, like property management (PM) and construction management, scale plays a crucial role. While in-house control offers efficiencies, it can also lead to conflicts of interest. For instance, if a sponsor’s in-house PM charges 4% when the market rate is 2.5-3%, you need to assess whether those additional costs are justified by superior performance or could erode your returns.

    Ultimately, it's not just about the numbers or the spin—it’s about the expertise and judgment of the capital allocator. The real value lies in understanding how to interpret this data and knowing the right questions. Understanding the nuances involved in each investment decision deeply and weighing these factors according to your investment goals and risk tolerance is essential.

    0Reply
  • Greg Kasmer
    Rental Property Investor · Philadelphia, PA · Member since 2021 · 774 posts · 501 votes
    2y
    Quote from @Mikhail Pritsker:

    Hello everyone!!

    Today, I want to discuss the importance of the Sponsor Underwriting Process. Part I.

    Introduction

    Sponsor underwriting is a critical aspect of real estate and investment analysis. It involves evaluating a sponsor's capabilities, track record, and financial stability to ensure they can effectively manage and execute a project. This post will explore the sponsor underwriting process, utilizing a structured and practical approach for assessing potential sponsors.

    Sponsor Screening Process

    The sponsor screening process can be divided into several key steps, each crucial for a thorough evaluation. The following steps outline a practical approach to sponsor underwriting:

    Sourcing of the Sponsor

    Identify potential sponsors through various channels such as websites, referrals, and industry events (There are about 6,000 Funds and Sponsors in the USA). This step involves casting a wide net to gather a diverse pool of potential sponsors. Online platforms, industry conferences, and networking events are excellent sources for discovering new sponsors. Utilizing referrals from trusted industry contacts can also provide reliable leads. The goal is to compile a comprehensive list of candidates who meet the initial criteria for further evaluation.

    Analysis of Public Information

    Review publicly available information, including the sponsor’s website, marketing materials, and any available financial reports. This step focuses on gathering and analyzing information that is readily accessible. Sponsors often provide extensive website information, including their mission, vision, portfolio, and testimonials. Analyzing marketing materials can offer insights into their branding and market positioning. Financial reports, if available, provide a snapshot of their financial health. This initial analysis helps filter out sponsors who do not meet basic qualifications.

    Initial Contact and Information Request

    Contact the sponsor for additional information and clarification on their projects, team, and track record. Establishing direct contact with the sponsor is crucial for obtaining detailed and specific information. This step involves sending formal information requests and setting up meetings or calls to discuss the sponsor's capabilities. Ask targeted questions about their experience, project management processes, and critical team members. This interaction also allows one to gauge the sponsor's communication skills and professionalism.

    10 Questions for the First Call

    1) What's the Sponsor's investment thesis?

    2) What's the track record? When did they start it? When did Partners start the RE business? Years of experience? Tenure together?

    3) Internal vs External (In-house service teams vs Outsourcing: AM, PM, IR, Back office, Operations)

    4) Does the Sponsor prefer a single market? A group of markets?

    5) Internal vs External (In-house service teams vs Outsourcing: AM, PM, IR, Back office, Operations)

    6) How did you handle difficult situations in business? Unforeseen problems?

    7) What makes you unique as a Sponsor?

    8) What's the Strategy for the next 5 years? (capital raising plans, including new funds, strategies or business lines)

    9) What's your pipeline for the next 3-12 months?

    10) Please provide an example of the Quarterly Report, Financial Model (underwriting), and the current deck of the Firm.

    Mikhail - I've found wide variety in the transparency of financial information made available during my LP Investments. I think your suggestion of a quarterly report is spot on! Great list!
    0Reply
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