HOW can I become a trusted sponsor?

Question

I've formed a syndication firm and I am looking for some advice. At the firm that I work at, I have a track record in finding and helping acquire large multifamily in the widest. Many of the brokerages and off-market connections I have do not service the small commercial that my company is looking for as I start up – 5-30 units roughly. This is my target range based on accredited investors I know, previously had conversations with, or think will be on board.

Now, ideally I would like to acquire larger deals to get economies of scale and reduce overall risk in terms of the operations of the asset itself. But if I must start small to get big then that's what I'm willing to do.

For context, I am a very conservative underwriter, and stress test the crap out of everything before I get excited about a deal. I especially am not starry eyed when underwriting exit valuations which is where I think some go wrong. I utilize a lot of AI tools I've made myself to source and find off market deals and assist in speeding up some of the mundane tasks in real estate. I do not quite trust AI to effectively underwrite, but I do trust it to help quicken the initial pass when reading RR, trailings, and some other docs found in the deal room. I have a small group of smaller brokerages, small balance lenders, insurance brokers, etc that I have formed connections with - but nothing that creates a competitive advantage in the space. And one of my personal connections or Co-GP opportunity would have to be the loan guarantor.

How can I find and convey that I may be an investable sponsor in this space with the company starting from level 1? I know the first several will be the hardest and I want to do it right.

Thanks for any tips!

Shawn

Brian Burke · Answer

There are only two keys that unlock the door to trust:  time, and performance.

Everyone wants to start big.  Very few are successful at doing so.  Of the few that are, few of them survive long term.

Start within your reach.  The people who trust you at this stage are most likely the people that already trust you for reasons outside of real estate investments.  That will naturally limit your initial scale.  Then build it from there, organically.

I spent over a decade grinding small-scale.  Now I’ve bought over a billion in real estate.  It all started with one single family house, and the journey was years upon decades of commitment and performance.  That’s the recipe.

Stuart Udis · Answer

@Shawn Benteti Do you own any investment property today, even if it's much smaller than the deals you're hoping to do in the future? If so, start there. Those properties are your proof of concept and the stories you'll be able to share with friends and family, who are often the first people willing to invest.

If you don't own any investment real estate yet, that's probably the first step. It's much easier to convince investors and lenders to back you when you've already completed a deal and can point to actual results. Early on, I'd focus on cultivating relationships with people who already know and trust you. At that stage, they're investing in the person as much as the real estate.

I think a lot of people jump to syndications too quickly and underestimate how difficult it is to raise capital from outside investors without a track record. Particularly right now where it's extremely difficult to raise LP capital.  It's probably not what you want to hear because it's a slower path, but it's a much more realistic progression.

Evan Polaski · Answer

@Shawn Benteti, who are you trying to build trust with?  The brokerage community for the 5-30 unit deals?  Owners of deals, since you are looking for off-market?  Investors?

As Brian noted, it is time and performance, primarily.  But brokers/sellers primarily care about price and terms.  I was in final interviews for a deal, but lost it primarily because the other bidder was same price but already had equity lined up in their fund and owned other assets.  Then I found the current deal I was awarded, because the broker, seller and I all get along pretty well.  I haven't closed on anything as a GP, and was honest about it, but I was also competitive on price, and close enough on terms.And building trust with those groups are as "simple" as actually closing the deal.  To me, it is investors that are harder to get on your team.

For them, it is time and performance.  This is why your first deals will be friends, family, coworkers, etc.  Anyone that has known you, likes you and trusts you in the capacities you have interacted with them over the years.  Over time, that evolves to strangers, and the "best way" to do that is to write a book, host a podcast, guest on others, share your stories anywhere you can.  It is all marketing.  You are sharing what you know for free, in an effort to find those people that are interested enough to learn about it, and ultimately invest with you.

Ronald Rohde · Answer

You need an actual deal.

On a more philosophical level, trust is built by making a promise and delivering on the promise.

Just start talking to people and providing value, help them with existing investments for free, review GP update letters for free, etc.

Shawn Benteti · Answer

@Stuart Udis Thanks for the feedback! Unfortunately, yes this a realistic perspective that I've thought about. I don't particularly love the small small size deals as an investment vehicle but to your point, I may just have to start there. A lot of the deals I've been underwriting or looking for off market have been 10-20 units. Would you suggest going down to even residential 1-4 units? I agree, track record is the most important priority right now.

I currently do not own any investment properties, rather focused on building my skills in the syndication space. I do have profits interest in 7 deals that I've either sourced or run point on post acquisition. Many of these were a team effort to varying degrees with my mentor in the space, so I do not know if I could directly point to those as my track record since it wasn't just me.

Thanks again!

Chris Seveney · Answer

Your best bet would be to try and go work for a syndicator and gain additional experience, as the market is very tough today for capital raising

Shawn Benteti · Answer

Thanks @Sean O'Keefe Yes, I've made a document in my business files about the different tax notes for my fee structure and profits interests. I've also detailed the multi-LLC entity structure I will use when acquiring and managing each deal. One of the struggles I've had is shopping attorneys for the creation of the legal documents. I've applied to several free legal clinics held at large universities to seek guidance on drafting PPM, LOI, OA, and subscription agreements. These legal costs could run me 15-30k+. Are there ways to make that more affordable without cutting on quality and protection?

@Garret Rumbea Would love to connect. It would be helpful to pick your brain on how you came to scale and leverage your partners experience to create your firm. Even being in the business for a while and having the great mentorship I've had, allowing me to touch many parts of the business, I feel there are a thousand things I still need to learn and be prepared for.

Garret Rumbea · Answer

Thanks for sharing. Sounds like you have a similar background as myself as I also worked for a syndication firm before starting my own with a couple of partners who have more experience. We target 100+ unit  multifamily because of that, and we also put in a significant amount of our own capital into our deals too. Happy to connect and share more about it if helpful.

Sean O'Keefe · Answer

@Brian Burke and @Evan already covered the trust building side better than I could. One thing worth getting right early, before you've got your first deal's operating agreement drafted, is how you're structuring your own comp as GP, since that decision made now is a lot cheaper to get right than to unwind later.

Sponsors typically get paid two different ways, fees and the promote, and the IRS treats them completely differently. Acquisition fees, asset management fees, disposition fees, all of that is ordinary income to you and it carries self employment tax on top. The promote is different if it's structured properly as a real profits interest rather than a fee, it can flow through as capital gain rather than ordinary income, with no self employment tax attached. But that only holds up if the underlying assets are actually held long enough. There's a three year holding period test that applies specifically to carried interests in real estate, and if the fund exits before that clock runs, the portion of your promote tied to short term gain gets recharacterized and taxed at ordinary rates instead of long term capital gains, even if everything else about the deal was clean. A lot of new sponsors don't find out about that until their first exit, and by then the structure is already baked in.

The other thing worth thinking through now, since you mentioned a personal connection or Co-GP being the loan guarantor, is that a guarantee isn't just a formality, it's what gives you or that person basis and at risk amount in the deal for tax purposes, and it's also real personal exposure if the deal ever goes sideways. Worth having that conversation with whoever's guaranteeing explicitly, in writing, before the first close, not after.

This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

Shawn Benteti · Answer

Thanks for the responses!

@Brian Burke Very helpful feedback. Any qualities that you would highland generate good performance?

Of course, buy the property write and underwrite upside and risks well play a big role. Operationally, what separates a good stellar operator from a good operator?

@Evan Polaski Mostly looking to find Investors and build trust. I'm generally able to build good relationships with others in the industry and owners. I try to attend an event at least twice a month where Investors are hanging out and the feedback has been that I'm too new and need a resume of performing assets. Not discouraged at all, I am eager to find my niche.

And to both of your points, I am actively searching for that first deal, starting small where friends and family can participate. My thought process, is they are accredited but not large enough to handle another investment opportunity close together in time, so I need to be actively building my investor pool if I want to act on great deals that I find.

HOW can I become a trusted sponsor?

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