Updated · Part of the CRE investment glossary
What a sponsor does
The sponsor carries the deal from first look to final distribution. The job usually includes:
- Sourcing and underwriting: finding the property, building the model and putting it under contract.
- Financing: arranging the loan and, often, having principals sign the loan guaranties the lender requires.
- Structuring: forming the entities, hiring securities counsel and setting the terms in the operating agreement.
- Raising equity: presenting the deal to investors under an exemption such as Rule 506(b) or 506(c) of Regulation D.
- Asset management: running the business plan, overseeing the property manager, budgets, leasing and capital projects.
- Investor relations: reporting, distributions, capital calls and getting K-1s out with the CPA.
- Exit: deciding when to refinance or sell, and paying out the waterfall.
Sponsor, GP and manager
"Sponsor" describes the business; the GP or managing member is the legal entity. In a common structure, the issuer is a single-purpose LLC that owns the property and admits investors as members. A manager entity controlled by the sponsor runs the issuer and holds the sponsor’s economic interest.
Some deals have several sponsors. Co-GPs typically join through the manager entity, each with a share of the fees and promote set in a separate agreement. Investors should know who does the work, who signs the loan, and who can be removed under the operating agreement.
How sponsors are paid
Fees vary by deal, asset type and sponsor, and there is no standard rate. Each one is set in the operating agreement and disclosed in the offering documents. Common ones:
- Acquisition fee: a percentage of the purchase price, paid at closing.
- Asset management fee: a yearly percentage of equity raised, or of collected revenue.
- Property management fee: a percentage of collected revenue, when an affiliate manages the property.
- Construction or capex management fee: a percentage of the renovation budget.
- Refinance and disposition fees: a percentage of the new loan or the sale price.
- Promote: a share of profits after investors receive their capital and preferred return, sometimes rising at higher hurdles.
Worked example: one deal’s sponsor compensation
A sponsor buys a property for $10,000,000, raises $4,000,000 of equity, holds for five years and sells for $13,000,000. After investors get their capital back and their 8% pref, $2,000,000 of profit remains and is split 70/30. The fee rates below are an example, not a market figure.
Fees total $630,000 and the promote is $600,000. Fees are paid whatever the outcome; the promote is paid only if investors are paid first.
| Item | Basis | Amount |
|---|---|---|
| Acquisition fee | 2% × $10,000,000 | $200,000 |
| Asset management fee | 1.5% × $4,000,000 × 5 years | $300,000 |
| Disposition fee | 1% × $13,000,000 | $130,000 |
| Promote | 30% × $2,000,000 | $600,000 |
| Total | $1,230,000 |
What investors check in a sponsor
Investors are passive, so they underwrite the sponsor as closely as the property:
- Track record on full-cycle deals, with actual results against the original projections.
- Fee load relative to the promote: a sponsor paid mostly in fees earns money even if the deal underperforms.
- Co-investment: how much of the sponsor’s own money is in the deal, and on what terms.
- Conflicts: affiliated property managers, lenders or contractors, and how they are disclosed.
- Reporting: how often investors hear from the sponsor and what the reports contain.
- Removal: whether investors can replace the manager, and for what causes.
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.