Key Questions for Commercial Real Estate Investors to Ask Their Transaction Sponsor

Before you sign the Private Placement Memorandum (PPM), you need to ensure that, as part of your due diligence, you have quizzed the sponsor on all things important. It may seem that the PPM would hold all the detailed information you would possibly need (and it probably will), yet you should go a step ahead to indulge in a detailed conversation with the sponsor.

Trust me, a lot of things will be clarified if you just sit down and talk, perhaps over a cup of coffee? This is important for a few reasons:

☑️ A sponsor answering your questions in person will make it apparent whether they have all the knowledge as displayed on the papers.

☑️ A one-on-one conversation would give you a clearer picture of how confident the sponsor is about this deal.

☑️ These questions help investors grasp not just the basic numbers but the overall strategy for the investment.

So, if you are ready to ask some questions but don’t know what they should be, here’s a list of questions I have compiled from my years of experience in the real estate industry:

13 Questions to Ask Your Transaction Sponsor that Many Investors Are Not Asking

1. What's your worst-case scenario exit strategy?

It's easy to get caught up in optimistic projections, but it's crucial to understand how a sponsor plans to mitigate losses in a downturn. A well-prepared sponsor should have contingency plans for various market conditions.

2. How do your projected returns compare to actual returns on your past deals?

This question can reveal a sponsor's track record and the reliability of their projections. Be wary of consistently over-optimistic forecasts that don't match past performance.

3. What specific local market factors could negatively impact this investment?

Every market has unique challenges. A knowledgeable sponsor should be able to articulate potential local risks, from zoning changes to economic shifts specific to the area.

4. How much of your own capital are you investing in this deal?

A sponsor with "skin in the game" often indicates confidence in the deal and aligns their interests with those of other investors.

5. What's your contingency plan if key tenants leave or default?

Understanding how a sponsor plans to handle potential vacancies or tenant issues can provide insight into their risk management strategies.

6. What's your track record on meeting capital call projections?

Unexpected capital calls can significantly impact returns. A sponsor's history with capital calls can indicate their financial planning abilities.

7. How do you plan to add value beyond basic property management?

Value-add strategies can significantly boost returns. Understanding a sponsor's plans for improving the property or increasing its value can provide insight into potential upside.

8. What's your policy on sharing detailed financial reports with investors?

Transparency is key in any investment. A sponsor's willingness to provide comprehensive, regular financial updates can be a good indicator of their overall approach to investor relations.

9. What's your experience with similar properties in this specific market?

Local market knowledge and experience with similar asset types can be crucial for a deal's success.

10. What's your plan for refinancing or selling the property?

A clear exit strategy is crucial. Sponsors should have a well-thought-out plan for realizing returns, whether through refinancing or sale.

11. How do you handle investor communication during market downturns?

Transparent and frequent communication, especially during challenging times, is a hallmark of a reputable sponsor.

12. Can I use my invested capital for a different deal in the future? If yes, how can I get out of this deal?

This question addresses investment liquidity. Commercial real estate investments are often illiquid, meaning it can be challenging to quickly convert them to cash or move capital to other opportunities. Understanding exit options allows you to adapt to changing personal financial needs or market conditions.

13. What are the compliance regulations you are following for this deal?

This question ensures the deal is structured in compliance with relevant laws and regulations, protecting you from legal risks. It also helps you to understand the legal structure of the deal and any associated reporting or disclosure requirements.

Wrapping Up!

The right questions can be the difference between a successful investment and a costly mistake in commercial real estate. But how many of these questions would you have thought to ask before reading this blog?

Imagine sitting across from a transaction sponsor, armed with this knowledge. You become not just another investor - rather, you're a savvy partner who understands the intricacies of the deal. The sponsor leans back, impressed by your insight. "Now, that's a question we don't hear every day," they might say.

Remember, your hard-earned capital is on the line. These aren't just questions; they're your shield against potential pitfalls and your key to unlocking hidden opportunities. They transform you from a passive investor to an active, informed decision-maker.

So, what's your next move? Will you tuck this list away for "someday," or will you seize the moment? Challenge yourself to use at least five of these questions in your next investment conversation. Better yet, share this list with a fellow investor - you might just save them from a costly mistake or help them uncover their next big opportunity.