Questions to ask a sponsor before you invest

When you invest passively, the property matters, but the people running it matter more. A good operator can navigate a difficult market. A weak one can struggle in a good one. These questions help you learn which you are dealing with.

Experience and track record

• How long has the team operated, and through which market conditions?
• Can I see the full track record, including deals that underperformed or were sold early?
• What went wrong in the hardest deal, and what changed afterward?
• Who on the team has actually operated properties, not only raised capital?

Alignment

• How much of their own money is the sponsor investing alongside me?
• What fees are paid regardless of performance, and what is paid only if investors do well?
• How are conflicts handled when the sponsor's affiliates provide services to the deal?

The business plan and its assumptions

• What has to go right for this plan to work?
• How does the outcome change if rents are flat, occupancy is lower, or expenses such as insurance and property taxes rise?
• What is the plan if the sale takes longer than expected?

Debt

• What type of loan is it, and when does it mature?
• Is the interest rate fixed, floating, or protected by a cap, and what happens when protection expires?
• What would a refinance require, and what if the market makes that hard?

Reporting and communication

• How often will I receive updates, and what do they include?
• How are problems communicated, and how quickly?
• Who will answer my questions, and can I speak to them directly?

Downside and legal protection

• Could investors be asked for additional capital, and what happens if they decline?
• What rights do limited partners have if the sponsor underperforms?
• Has an attorney of my own reviewed the offering documents?

How to check the answers

Ask to speak with existing investors, especially ones the sponsor did not hand-pick, and ask what happened when a deal did not go to plan. Compare what you are told with what is in the documents. A sponsor who welcomes hard questions is showing you something useful.