In Part I of this blog series we reviewed additional items to look for when vetting a sponsor for a real estate investment.

Some kinds of “skin in the game” are better than other kinds.  If the sponsor has his own capital invested, that is the best indication that they believe in the deal.  If the sponsor uses “other people’s money” for their investment – this is not unusual in deals with a General Partner and multiple Limited Partners, then that can be a red flag.  It is not unusual for a sponsor to claim that because he has owned the property for a certain length of time and theoretically it has appreciated in value from the time he purchased it that he is entitled to use this “appreciation of equity” as his capital contribution.  It may well be true that by getting certain entitlements attached to the property is has increased in value, but none the less, making an investment where the sponsor is using the past appreciation of the property as his equity is a riskier investment then a situation where the sponsor is putting in his cash on the same basis as his other investors.

Sponsor fees:  The sponsor almost always charges his investors fees for his expertise and time and trouble in putting the deal together.  These fees should be appropriate and not so high that

they prevent their limited partners from making money.  The gold standard for these sponsor fees would be what are known as “success fees”.  This type of fee links the amount of fee the sponsor receives with the amount of appreciation of the property.  A successful property rewards both the sponsor and his investors.  Look out for scenarios where the sponsor gets a big payday even if the limited partners make little or no money.  This seems like just common sense, but as you evaluate various opportunities to invest in commercial real estate partnerships using these commonsense tips will make a significant difference between a good investment and a bad one.