Process to raise capital as a sponsor/GP on a real estate deal?

Hi Guys, 

So basically I'm soon to finish my bachelor of real estate degree and already have a super good job lined up. However I'm very entrepreneurial and want to invest in real estate as a sponsor and raise capital for properties on a  deal by deal basis, howver I an not too sure of the exact process or best practices to follow in getting deals done as a sponsor. 

I have a great network to tap into who are interested in investing into CRE but don't have the time, but they have the money and want someone to manage the deal and do the heavy lifting, obviously this is where I come in as a sponsor. 

Obviously after building a good network and finding a good deal what is the best practices, and step by step?

Here is what I think and would like everyone input if they can help...

  1. Find a good deal, off/on market and throw it into my model and underwrite/value it.
  2. Do research on the local market, i.e. demand and supply, rent values ect. 
  3. If everything seems to check out, prepare investment memo/pitch book and tighten up the model, send off to network. (obviously it has to look professional)
  4. Discuss it with the investors and explain anything they have questions on. 
  5. Once you get a soft commitment from the investor you make the agreed bid on the property, and send them the offering memorandum. 
  6.  If bid is accepted the down payment must be secured by the investor (earnest money). Either me or the partner/investor pays the earnest money depending on I guess a handshake previously.
  7. Now its usually 30-40 days before we have to get all the legal stuff (LP-GP agreements) and due-diligence done and financing finalized, presuming there is leverage used.
  8. Then if everything goes well you close on the deal, acquisition fee is processed (is the fee financed by the bank loan as a cost? How do you make sure you get this?)
  9. Then obviously there needs to be capital already raised on closing to absorb any cash out flows needed to pay the loan and letting up costs ect.
  10. Then the rest is basically all asset management stuff and disposition eventually.

Obviously investors gets his/her pref and then its an agreed waterfall equity split.

Is this (at a high level) the correct process to go about it? Am I missing anything or getting some things the wrong way around?

Finished a bachelors of property degree which went through investing in property, DCF/valuation, law, and market research, however seemed to leave out how to put investment deals like this together. 

Really appreciate the input guys. (especially those in acquisitions or have acted as a sponsor on deals before or run there own operator/investment shop.

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Comments (19)

Nov 18, 2021 - 10:53am

First I would get specialized in what types of deals do you want to focus on. Do you want to focus on value add multifamily larger than 50 units, smaller than 50 units local to you where you self manage, mobile home parks, etc? Things like this then drive other "issues" I would call them. Because if you are raising money from multiple investors, you need to put together the correct legal paperwork as well for a syndication. If I was a broker and was looking at you submitting an offer on a $5 million property, for instance, 20% down plus closing costs, how can they take you seriously enough to know that you will be able to raise $1 million before closing? Do you have $50K to put down as an EMD? $15-$20K for a securities attorney to put together offering paperwork? 

I would think about all of this before trying to go out on your own. But then again, you could find a mentor local to your network who is already doing deals, maybe bring them a deal that you find interesting, but am able to tap their resources to get the deal done. Having a partner with a track record is absolutely essential to getting a deal across the finish line. 

Just some things to think about. I know a lot of people who have started smaller (buying a 4-plex using a conventional mortgage, 3,5% down, no investors) and snowballing that forward. Or you could go big, partnering with someone who is experienced to who you can bring value in some way (boots on the ground, bringing LP capital to the table) to then get that larger deal across the finish line. 

Good luck! There is a lot to think about. I say this as a younger adult in REPE who went out there and just got the larger stuff done instead. Much easier, in my eyes. 

Nov 18, 2021 - 4:18pm

Hey dude thanks alot.

I think getting that first mentor is key to getting the track record and a bit of cash under you thankyou.

What do you say to a broker when you're putting a bid in and you still need to raise more money? Or do experienced sponsors already have capital lined up before submitting the bid and just need to get the loan approved? If you do the later you would miss out on heaps of deals as you're not getting them under contract and then raising under the cooling off period.

Yes the legal paperwork is expensive so I would be looking at a limited partnership structure with just one investor to start with (the mentor)

Thankyou.

I'll look at starting small and getting some experience on my own, as well as finding an experienced mentor to partner with and which ever one happens first.

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Nov 18, 2021 - 4:46pm

No problem. 
If the broker happens to ask about capital and where it is coming from, you could just say that you have it handled and the capital is all in the partnership (no external capital to be raised). I have had only a couple times where the broker straight up asked me where the money was (this is on a $50MM+ deal) and I said that we are currently raising it and will have the money committed well before we come to the closing table. Also was risking a large EMD. It is all a simentaneous dance. You would be having the deal sized up with a mortgage broker (I have one I work on who specializes in my asset class) and this would usually come after initial underwriting. I use rule of thumb for the market in terms of rate and LTV, and go from there, then the lender can go into more detail from there. But you would do underwriting and having the lender take a look at this before you submit your initial LOI. Then if your offer is competitive, the brokers usually will take you into Best and Final, asking you to "sharpen your pencils" on the offer aka offer more money and give the seller the best case when it comes to closing the deal. 

Nov 18, 2021 - 2:04pm

It's better if you can get control of the site first, otherwise you have a lot less leverage/practically nothing to offer an LP. In our experience the steps more typically are:

1. Get control via signed term sheet. Source LP equity and tee up due diligence while negotiating PSA. 

2. Sign PSA, developer generally posts 100% of initial EM deposit 

3. Push through DD and joint venture agreement 

4. Before expiration of feasibility, sign JV agreement and true-up EM deposits/sunk costs with partner (generally 50-50), clear remaining diligence 

Nov 18, 2021 - 3:42pm

On development deals in particular, EM is usually refundable if you bail prior to expiration of your feasibility period, so we don't have risk of losing deposits. On some deals (SFR in particular), sellers require non refundable EM on day 1, which is definitely trickier and requires at least a gentleman's agreement with a capital partner before we would put more than $25-50K at risk. 

Nov 18, 2021 - 5:01pm

So basically you get the site under contract and then go from their to keep raising capital and close after dd etc.

Obviously you'd have a term sheet with some potential investors before finding a site.

If the sponsor doesn't have enough for the earnest money whats the best thing to do? Can you organise that from your Lp and get the LP involved earlier?

Most Helpful
Nov 18, 2021 - 6:44pm

We don't get a term sheet from investors before finding a site--we get control of a site first and then present the deal. Big institutional LPs are presented hundreds of deals--many don't want to waste their time talking economics until you have contractual control of the property. 

Yeah, the alternative would be to either identify a friend/family who is contributing to the GP stack to help you fund it...maybe you could get an LP involved earlier. I am not trying to discourage you whatsoever, but the reality is that if you don't have the firepower to post an earnest money deposit you probably aren't ready to go off on your own as a new sponsor entity. On top of a deposit, you should be prepared to fund 50% (sometimes 100% for your first couple of deals until you have a track record) of predevelopment costs through closing, plus whatever you need to pay yourself to keep the lights on, and run through all the corporate entity formation docs, business registrations, subscription agreement template, worker's comp insurance, and other set up costs. It's very hard to get a sponsor entity off the ground without a significant six figure slug of capital to get you going--god's honest truth.

Nov 19, 2021 - 4:21pm

Setting aside the rest of the post, I think you should probably hold off on all of this for one reason: your Steps 1-9 are the easiest and simplest part of the process.  The fact that you are brushing off the actual execution of the deal as "basically all asset management" is a pretty decent tell you have no idea what you're doing.  Maybe spend a couple years at your job and figure out what it takes to execute on even a low-maintenance deal and then come back around.  90% of the work you'll need to do and the headache you'll have to process is contained in that last step.

Or, to tie it to your larger point, lets put it another way.  I'm a wealthy person/institution, and you want my money to buy deal.  Why am I giving it to you?  I don't really care about the glossy pitch deck, or the market research you've done - none of that matters.  I'm investing in you.  In your ability to manage the asset.  In your ability to collect rents, to make sure repairs get done, to effectively lease up units, to add value somewhere or on some thing.  What do you have that my 2pm appointment doesn't?  What is your edge?  

These forums are finance-oriented, so it's not surprising, but all too often there seems to be an assumption that the most important part of the deal work is done from behind a desk - the market research, the underwriting, the pitch books.  But really that's meaningless fluff.  No one's underwriting is ever spot on.  All of the deal is in the execution, the management, the walking the building/sites and making sure everything is functionally smoothly, or sorting out unforeseen eventualities.  Anyone making the assumption that the first part requires a lot of work and that the rest can be handwaved away for now probably isn't going to do a good job executing

Nov 19, 2021 - 6:25pm

Yeah I actually like the asset management side and understand it most that's why its excluded from the question. Experience doing you're own deals with you're own money is crucial to convincing any LP's you're experienced enough and to prove that with some kind of deal sheet or something.

Nov 20, 2021 - 10:21am

I'm just saying that your pitch book, the one with the rental growth numbers and the comps and the nice glossy finish?  Only stupid people care about that.  What will matter is your plan to execute, and that's what your "pitch" should focus on.  I make my money by sub-metering electric to tenants, and here is how I do that.  Or I get a tax abatement from the city, or a grant to install solar energy panels, or switch the program by which I pay for water/sewer, and here are the relevant agencies/programs.

All of that is how an investor makes money (and you, obviously).  Telling someone "rent growth is going to be explosive" is a pitch for a given market, not a Sponsor.  Why am I paying you fees and promotes to sit back and passively watch a market take off?  I can pay third parties, just like you will, to run and maintain the building and save on all the other costs, which is several hundred basis points in all likelihood.

So yeah... your idea of how to go about this is generally correct, but you are focusing way too much on things that don't matter.  If you have huge amounts of capital you need to deploy, and it's reasonably cheap, and you have track record - then you go buy in growth markets.  But you in particular need to add value, or else said rich person/institution will just invest in the cheaper, bigger fund.

Nov 19, 2021 - 5:15pm

Toughest part about all this is that you are running in sync with all the steps. You risk losing your deposit and no broker is going to take you seriously at all if you dont have capital nor a history of owning anything. This is the absolute hardest part of this process. Its what makes it very difficult for new GPs to form. I am working one GP right now that has enough capital for EMD and half the equity, but if they cant raise the other half, they are royally screwed. Even if they get their EMD back that broker will blacklist them from future deals.

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Nov 19, 2021 - 6:28pm

Yeah that makes total sense. I believe every GP has done the whole thing themselves before over and over to prove you can deliver. Forgetting the few GP's who got bankrolled from the start which let's face it, a dime a dozen.

Starting small on your own is a good point.

Nov 21, 2021 - 6:49pm

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