Sponsor Roles and Varieties
The GP is tasked with finding, acquiring, developing, and managing real estate properties on behalf of the investment partnership, typically structured as an LLC, LP, LLP, or LLLP. While many others play important roles, e.g., limited partners, contractors, lenders, and related service providers, the reputation and success record of the sponsor are the first factors an investor should check.
Some developers will undoubtedly come to mind. Think of Cushman & Wakefield, whose predecessor company was founded in 1784 in Birmingham, England, and went on to develop Chicago’s Sears Tower. Today it is known as one of the top four real estate services providers internationally.
There are three types of commercial real estate sponsors, each with different motivations, capitalization needs, and opportunities for investors.
CRE Operators/Developers
CRE operators and developers either own or build portfolios of income-producing multi-tenant properties. For instance, a shopping center developer with ten lifestyle centers nationwide and three new developments underway requires capital to expand its company, develop new projects, acquire or recapitalize properties, and refinance existing assets. Specializing in particular property types and geographic regions, operators and developers offer investment opportunities at various levels, including the operating company, portfolio, project, and fund.
Corporate Owner/Occupier
Private companies in this category own the buildings or spaces where their business operations take place, such as food & beverage producers and distributors using distribution warehouses. These corporate owners/occupiers need to grow their businesses, often owning multiple warehouses and needing more capital to support their expansion plans. Monetizing owned assets becomes crucial to financing further company growth. When investing in a property that is owner/occupied, a primary consideration is the creditworthiness of the issuing corporate owner.
Many owners/occupiers, such as major food producers or distributors of packaged goods, may require financing both for existing and new single-tenant warehouses (and office headquarters) either on a project-by-project or portfolio basis. To do so, they may take multiple approaches to monetizing their owned real estate. One common strategy is a “sale-leaseback.” In this arrangement, the owner continues using the property while monetizing, or recapturing, the capital investment and the increased value in the building derived from their long-term lease. Companies such as Sun Microsystems Inc., British Petroleum, and Dell Computer have used this strategy.
CRE Investment Funds
Commercial real estate investment funds employ specific investment strategies to pursue above-average returns relative to the level of risk. These funds leverage their expertise, access to opportunities, and executional capabilities to pursue strategies such as distressed asset/loan investments, redevelopment, value-add initiatives, or repositioning of properties. These approaches can be tailored to specific property types, geographic regions, or opportunities.
For instance, an investment fund may acquire off-market underutilized mixed-use projects in the Southeast, given its favorable demographics, hoping to enhance its value. The investment’s duration varies depending on the fund’s mandate, but many seek to exit once the property has stabilized, typically within 3-5 years, through a sale or refinancing.
CRE investment funds commonly raise capital from accredited investors seeking higher returns, understanding the associated risks, and the longer-term commitment required. A typical compensation structure for these funds is the “2 and 20” model, where the fund charges a 2% annual management fee based on net asset value and receives 20% of the generated profits.
Different types of sponsors represent varying risk profiles for investors. For example, a CRE developer proposing a ground-up development presents higher investment risks, as investors are relying on the project being executed on time, within budget, and either sold or operated as projected. Before assuming this level of risk, research the sponsor’s track record first, no matter the type of sponsor.
