BPI Episode #11: Navigating Market Cycles with the Right Real Estate Sponsor

Welcome to Building Passive Income, the podcast for professionals, entrepreneurs and investors who want to build wealth, diversify beyond Wall street, and create financial freedom through passive commercial real estate investing. Your host is Wayne Courageous iii, a seasoned investor and founder of CREI Partners, a leading commercial real estate investment company. He spent nearly two decades navigating and educating others on the commercial real estate, from multi family to storage to retail. Each episode is under 15 minutes, intentionally short, easy to understand, and packed with insights that help you grow your income and protect your capital without becoming a landlord or sacrificing your time. If you're ready to learn fast and invest smarter, you're in the right place. Let's get started.

All right. Welcome back to Building Passive Income podcast. I'm your host, Wayne Courageous. I'm excited today to talk to y' all a little bit about what to look for in a sponsor. So the sponsor is what I call the jockey on the horse. He's or she is the one who's going to be guiding the investment process over the next three, five, seven plus years. And you really want to make sure that you have the right sponsor, the right jockey on the horse to deliver the business plan. So here's some ideas or things to consider when looking for that because it doesn't matter, matter how good of a project is, if you don't have the right person or people team helping run the day to day of the asset, it's not going to be a good investment. There's a saying like you can have a great deal, bad sponsor, it's going to be a bad deal. You can have a poor deal with a great sponsor and it could potentially be a great deal. So what to look for in a sponsor, first and foremost, track record. And this is something that is important. Whether they, the person that you know has done this for the first time or not is a question to definitely have answered, but also to see who on their team may have the experience that they lack it. Right? So for example, we all start somewhere. I had the experience with CBRE doing a lot of the asset management, property management for institutional clients and their properties. So I had a lot of background with my career with CBRE over 16 years. By the time I transitioned over to CRI partners full time, you know, a lot of that experience carried with me. But you have a lot of people that get into real estate from other occupations and that's not a bad thing. I mean, that's, that's good. I mean you want, we want people, good people to come into real estate because you know, for many reasons, it does diversify and grow wealth and it is a passion for many. So it's not that we want to take away from no track record, it's that we want to see that that person is partnered with people who have the track record. Right. So no matter if the person you're dealing with hasn't done it, who are they partnering with to strengthen that team? Right. So that's one of the things I look for for newbies is if there's anybody that hasn't done a full cycle or hasn't gone through a transaction themselves, to me that's okay. If they're partnered with somebody that you vetted that you're comfortable with their track record and their experience. And when you look at their track record, you're more looking at like the number of deals they've done and when I say number of deals, also the number of deals in that type of asset class. For example, if their focus is heavily main on multifamily, but they're doing an office retail, again, if they don't have that experience in that class of investment, are they partnered with other people who, who may offset that experience? But typically, you know, for us like CR Partners, you know, we're focusing heavily on multifamily and that's a lot of our experience has been. So you look at the number of deals, you look at the returns, the projections. Lately I've been really getting good questions on like can you show us a screenshot or video the your communication with investors? And I think that's been a really good and eye opening experience for them because they'll see that. Like here at CRI Partners we do monthly updates and not everybody does monthly updates. They may do quarterly updates. There's no right or wrong in it. But you want to make sure that you are getting some transparency on what they are currently doing at their company and for their investors. Definitely look into the returns. Look at seeing if they are meeting or exceeding the returns for their investors or if they have a property that has been struggling. And if people have been in real estate for the last five, seven, ten years, there's been a lot of good and then there's been some downfalls with, with real estate. It's a cycle, right? And just like any investing, whether it's the stock market or cryptocurrency or real estate, any type of investment, there's going to be those ups and downs. So understanding, you know, what downs have that syndication or that sponsor team gone through and how do they get through it have they lost investor capital? Have they modified a loan, you know, to keep the deal going? What, what all has happened on the properties that have struggled. It's not uncommon for deals to have struggled over the last, you know, four or five years like that is. It's, it's just part of the, the market cycle that we are in. Especially in 2022, a lot of properties were bought at, you know, peak pricing. And as prices went down, giving cap rates went down and interest rates went up, or vice versa, the cap rates went up and interest rates went up. You know, those, those properties have been really hard to refinance and especially if there was bridge debt tied to it. So having the sponsor, when they're talking about their track record, having them being very transparent of all the things that have gone really well, but all the things also gone wrong and so that you can sort of see that they own to, you know, the process, that they're learning from it, but they're also being transparent that, you know, not everything goes well. But what do you do when those times don't go well? It doesn't mean you lose investor capital per se. It just means that it's not going as business plan. And when it doesn't go as to the business plan, what are we doing to offset that? Right. And so that's all part of the track record you want to hear. The good, bad and ugly, I guess is what I'm really trying to say when it comes to the, the track record of the sponsor, part of that is the transpar, you know, communicating through, through all the good and bad, as we, as I had mentioned, but also seeing, you know, their pace of investor communication. How is it going out? Are they opening up all the income statement or the financials on a monthly basis? So what type of reporting are they providing you as an investor? Now, mind you, like when you're passively investing in real estate, you are an owner in that owner entity, the entity that owns property or that's on the deed. So you should have access to, you know, what's going on the property. It amazes me when people come to us and like, hey, we know more about your deals and deals that we're invested in. It's just a huge head scratcher for me because I'm like, that's some of the excitement of investing is to be part of the communication, understand what's going on at the physical asset. One of the things that I also like looking at when looking for a sponsor is seeing what experience across market cycles do they have not just post 2020 growth. This is harder to find when you have people who have been in the industry five, seven years. You know, people that have come, you know, way back. I mean, I got into the industry back in 2007, you know, again, my whole life has been in, you know, adult life outside the Marine Corps, has been in commercial real estate. But you do want to see that, you know, what were they doing, you know, prior to 2020? Because 2020 there was a lot of growth, a lot of money made as cap rates compressed. And really what that was dealing with was the interest rates were so low and so it was really driving valuations of these properties. So just understanding that they've gone through different market cycles, I think it's important, or somebody on their team has gone through market cycles. They haven't just been an investor during the good times, they've been investors during the bad times. And then as I had mentioned before, what have they done to get through those bad times and those rough times? So you're wanting to just make sure, again, going back to what I said in the beginning, that you've got an experienced jockey on the horse that's going to take you through to the end goal, the investment. One of the things that I think is very important is to ensure they have skin in the game. How much are they Investing? With our GP sponsorship teams, we're typically putting 5 to 10% of the equity raise into the deal. So we are alongside investing heavily with our limited partners. So you want to see that their skin and game, not only does it show that they believe in the project, but they also are making aligned decisions because they have capital also tied up and invested in the deal. So one of the things that we pride ourselves on at CIA Partners that I think is just really important for you to find, whether you're investing with us or investing others, is just the ability to communicate and contact the sponsor directly. We had a deal recently that we put under contract and it's crazy because we had investors reach out to us and say, hey, can you give us more details? Because the sponsor you're buying that deal from, they're not communicating. We haven't received any communication updates. We don't know what's going on and that just is crazy. But really, I mean, all of our investors have my cell number, they've got our team's phone number, direct email, text, and we're available. And that responsiveness and transparency and that relationship based, driven mindset is so important, not only, you know, for myself, but Our team members at CIA Partners. So you want to have that access to the sponsor. And you know, one of the things, I was in Colorado a couple weeks ago and we had this prospective investor with a large investment amount that he was potentially going to do a 1031 into. And he had known us through some podcasts and through some relationships that we had on the GP team, but he didn't really know us personally. This was a 506C accredited offering and I could just tell that he wasn't 100% on board maybe because the trust wasn't there with us. And so I was like, you know what, let me put you in contact with one of our investors. And I literally called one of my investors while this other person was on the phone and I told him, I was like, hey, we, we have this prospective investor on the line curious about, you know, CRA Partners and the type of returns and investments that we do and, and you know, share the good, bad and ugly of what you've experienced with us. And, and he did and he shared all the things that he had experienced and the cash flow and the depreciation, the communication, et cetera and got this other investor on board that, you know, we are, we are good people and we want to do well for our investors and you know, prioritize the communication and such. So having that responsiveness and that relationship driven mindset is just, just massive. And it really grows into when you're asking like hey, can I have some referrals? Can I get other people that have invested with you want to get their experience. So just another way to vet and look for in a sponsor. So another thing to look for. I have a couple more items here. The list can go on but hopefully this will be a good starting point is looking at like are they controlling the deal? What's their asset management like? Are they hands on or hands offs? Again, there's not a right or wrong on this. You have general partner teams that certain people bring certain things to the table. Now everyone you know should be participating in asset management that's on the general partner team. You as a investor are limited partners so you're not responsible for day to day. But the general partner team is responsible for ensuring that the business plan is executed. And they do that through property management meetings and weekly calls. But you want to see if they are the decision maker and if they're not the decision maker, that's okay. You know, it's not the worst thing in the world other than going back to that transparency and that communication you want to know who is making those decisions and what's their experience. Right. What's their asset management level. At CRI Partners, we have full time asset manager, senior portfolio manager that, you know, covers our properties and does these weekly calls and goes through these conversations with our property management, does reviews the monthly reports, goes through, does quarterly reforecast. And so you want to make sure that you know, you've got someone on the team, whether it's the person that you have a relationship with, the sponsor, and maybe they're part of a bigger team and there's another asset manager on the team. You just want to see who that, that group is and who is running that asset management. You know, in today's environment, it is hard to close a deal, raising capital, et cetera, but it's even harder, day one of owning an asset when you're shifting from raising capital to actually operating. For me, that's the fun part. That's what I've done my whole career. And our team that we brought on, we're, we're equipped and ready to handle that. But not all companies have invested in team members and resources and technology and software systems, et cetera. And so you want to know who's, who's running that on the asset management side. All right. And the last thing I want to push on this podcast here is just really the integrity. When you get on a call with them or you're, you meet them in person, what kind of vibes are you getting? Right at the end of the day, this is a relationship, it's a, it's a business relationship. But you, you as sophisticated person listening to this podcast, you're able to tell if someone, you know gives good vibes or not. Right. And so I would just want to really push that. You make sure that you feel comfortable that who you're investing with is a good person, that they have high integrity, that they can handle challenges and bad news. And going back to what I was mentioning earlier, you know, just the transparency of properties that may have not gone as well as, as they had hoped, but what were they doing to, to get through it and you know, how did they solve the issue, et cetera. So just having that integrity, it's just, it's so important because that integrity, handling bad news, it's easy to handle good news and most of the time it is good news. But it's just the times where things get tough. We want to make sure that you're invested with a sponsor who is really looking after your interest and communicating, not putting their head under a pillow and going to, you know, fight for you for however many years that that sponsor and you as the investor and the deal. Hopefully this podcast helped generate some ideas and some future convers conversations. But if you want to learn more about investing passively in real estate, check out our Passive Investor Coaching Program. There's several hours of content that I put together and it goes a lot more deeper into evaluating not only a deal, but a sponsor itself. And you can go to passiveinvestorcoaching.com again. Passiveinvestorcoaching.com hey, if you're liking the content, go ahead and subscribe. Go ahead and share with your friends. Do a five star review. I'd really appreciate it. The purpose of this podcast is really just to help you, passive investors and others learn about passive investing to make educated decisions so you can invest wisely in commercial real estate and feel confident that what you're investing in is solid and going to diversify your wealth and continue growing cash flow for you. I hope all is well and looking forward to our next episode and hope everybody has a great rest of the day.

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