Today on the educational series of the podcast, join Duc and Vince as they give the steps to screen sponsors for your next deal! This is a big undertaking, especially for new investors. Your vetting skills for a deal sponsor determine the result of the time, money, and effort that you will be investing in the deal for the next five to ten years. We will get into some of the jargon that you might be confused with, the things you should look for in a sponsor, the questions you should ask, and expectations to set up. 

 

GP’s and LP’s, Sponsors and Equity Partners

To clarify things, when somebody says GP, that’s a general partnership, a sponsorship team. Other people also call them operators because they operate the property. These people are the managing entity that basically does all the work. If you hear things such as LP, equity partner, and silent partner, those all mean the same thing. They are the people who just put up their money for the deal. While they don’t have any say with what happens to the deal or the property, they also don’t have day-to-day responsibilities (as opposed to the operators or the GP). 

 

Don’t Get Distracted by the Flashy Design, Look at the Important Things!

Vetting a general partnership group is an involved process with certain key elements to keep in mind.. The first ones are the track record and experience. It’s essential to know what the sponsorship team has worked on in the past, as this may be an indication of future performance (though not always guaranteed). Another aspect to look into would be the different people that comprise the team (including third party members). By looking at the team’s components, you would see characteristics that might not show up through your questions. Speaking of which, you also have to read between the lines. Make sure that the way they answer your questions establishes transparency and clarity. Never think that there are “stupid” questions, ask it even if you’re 99% sure but need to clarify if you’re on the same page.

Want more tips? What about the numbers and documents? Listen to the full episode on The Cashflow Project!

 

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Outline of the Episode:

[00:29] Jargons: GP, sponsors, and operator versus LP, equity partner, and silent partner[01:49] What is a deal sponsor? Track record is important, but remember that past performance doesn’t always guarantee future success![02:36] The details to look for in a sponsorship team. Experience, advisors, and intuition. [03:42] The different people that work in a GP – deal finders, operations, and investor relations.[05:35] What about third-party team members? Property managers, contractors, attorney, and the lender.[08:18] The importance of referrals for limited partners and when looking for sponsorship teams. Look for somebody that has been a past investor with you. [09:22] Acceptable expectations for sponsorship teams. Read between the lines and see how they answer your questions. What communication will you be getting? [10:49] What questions should an investor ask a sponsorship team? Watch out for cash calls! Remember that this is going to be your partner for the next five to ten years.[13:36] Vetting the sponsoring of the deal as an LP. Keep that in mind, because there’s not much else to do!

 

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