Sponsors are generally investors' boots on the ground. From finding the right property to executing the business plan, they typically drive the process at every stage. No matter the market conditions, a wrong move by the sponsor can derail a project.
So, how does Crowd Street screen sponsors?
Here's a guide to understanding the role of sponsors and how Crowd Street's screening process helps ensure they meet our criteria.
What Is A Real Estate Sponsor?
Sponsors are typically the managing member of the General Partner (GP) entity of an acquisition or development opportunity. They usually oversee all investment and operational aspects of a CRE project.
Their work begins with setting the strategic direction — defining the project's investment thesis and goals, and making critical decisions about property selection, financing, development, and management in collaboration with other stakeholders.
Sponsors may also manage teams by, for example, assembling property managers, contractors, analysts, and advisors to help keep the project running smoothly. They oversee many things such as property due diligence, evaluating market conditions, financials, and regulatory requirements, and commissioning reports like environmental and zoning assessments.
Maintaining strong investor relationships is another key responsibility. On the Crowd Street Marketplace, sponsors are the party that will provide project updates, address challenges, and handle tax documents such as K1s. They are also responsible for ensuring compliance with legal and regulatory standards while working to identify and mitigate risks.
Finally, sponsors lead the exit strategy, whether through a sale, refinancing, or holding the property. This includes determining timing, pricing, and selecting brokers to assist with execution.
If it wasn't clear before, it should be now: the outcome of most CRE deals depends heavily on the sponsor, who manages investments from start to finish.
Sourcing Sponsors: Where Do We Start?
There are thousands of CRE sponsors across the U.S., and finding the right partner can feel daunting. Many of these sponsors are sub-scale, managing only a handful of projects.
When Crowd Street screens a sponsor, we narrow our focus with five key criteria: years in business, team strength, experience across market cycles, portfolio performance, and historic capitalization.
This narrows the field to sponsors who aren't just relatively well-capitalized — they've generally been through challenging conditions and persevered. In a market that ebbs and flows with cycles, working with partners who've weathered storms is critical.
Once potential partners are identified, the real work begins: sponsor screening.
How Crowd Street Vets & Approves Sponsors
Although Crowd Street serves individual investors, we strive to perform diligence in line with standards set by many large institutions. Every sponsor faces a nine-step process that includes background checks, structural vetting, and more.
Here's how it works:
- Review and Approve Sponsor Application: The process begins with a detailed application, ensuring that the sponsor meets Crowd Street's baseline criteria.
- Run Background Checks: Conduct background checks on the sponsor entity, officers, and all individual owners with a 20-percent-plus stake. This includes an assessment of professional history, relevant experience, professional certifications, legal proceedings, and more.
- Sponsor Financial Vetting: Crowd Street evaluates the sponsor's financial statements, including income statements and balance sheets, to assess overall financial health. This includes a review of profitability and expense coverage, cash generation, debt-to-equity ratios, financial performance over multiple reporting periods, and more.
- Corporate/Partnership Structural Vetting: Analyze the sponsor's legal and organizational structure, evaluating who has decision making authority and accountability. This includes verifying if the sponsor is structured as an entity of going concern or merely a shell.
- Investor Reference Checks: Crowd Street engages with past investors to assess the sponsor's reputation, communication style, and track record. This involves understanding previous investors' experiences in regards to investment performance, communication quality, and reporting practices.
- Run AML Checks: Perform Anti-Money Laundering checks to identify any potential issues.
- Review Track Record: Request the sponsor's historical performance through data and documentation, culminating in legal certification of their track record. Crowd Street also evaluates the performance of their existing portfolio, working to identify distressed or underperforming assets that may pose risks, and assessing the sponsor's overall capacity to manage additional projects.
- Escrow Account: Utilize an escrow account for offerings to help ensure secure transactions and complete documentation at time of funding.
- Present Screening Recommendation to Committee: Finally, present a detailed analysis to the Offering Review Committee, highlighting the sponsor's qualifications and readiness to partner.
This process is driven by a team with decades of CRE and institutional investing experience — and that's one reason why only one in 20 deals screened by Crowd Street makes it to the platform.
Finding Your Footing in A New Asset Class
Getting started in CRE can be overwhelming for some. The market is loaded with deals, and selecting one to invest in may not be easy.
A good first step is finding an experienced sponsor. Even in what many would consider a great market with exciting properties, projects typically need the right director to bring it all together.
Crowd Street can help make CRE investing easier for many. Every offering on the platform is backed by vetted sponsors. While no CRE investment is without risk, Crowd Street supports investors by handling a crucial step: sponsor screening.
To learn more about Crowd Street's due diligence process — including how it screens individual opportunities — visit our due diligence page.
