5 Critical Elements to Evaluating an Investment Real Estate Sponsor

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5 Critical Elements to Evaluating an Investment Real Estate Sponsor

For over 28 years, investors with Timberland Partners have profited from the benefits afforded to private real estate investors. But today, there are more sponsors than ever soliciting capital and promising to deliver superior returns. As an investor, your ability to separate the average from excellent is critical. Timberland Partners Apartment Fund VII (TPAF VII) is raising $100 million and we’d love for you to join us, and to do so with complete confidence in your decision.

Real estate has a low correlation to public market performance and substantially less volatility. It is a unique wealth-building vehicle that can offer dividend distribution, capital appreciation, substantial tax benefits, and a hedge against inflation.

To fully realize these unique benefits, you must participate in the private markets. For the majority of investors who lack the time, experience, or capital to purchase assets directly, this requires investing through a sponsor. With all of the noise and conflicting messages in the market, many potential investors find that selecting a trustworthy sponsor proves to be a challenge. These five criteria can guide your due diligence and help build confidence in your decision.

1. Track record

The first thing you’ll want to consider when investing with any potential sponsor is their track record of success in similar past deals. Ask to see evidence of consistent returns over time. Improvements in operational cash flow over time will illustrate whether the sponsor created value or simply got lucky with a well-timed exit. Be cautious of investing with any sponsor attempting a deal at a scale, or in a market, product type, or business plan with which they do not have previous experience and success.

2. Specialization

Check to see if your sponsor has developed expertise in a particular niche. Do they have deep operational expertise in a particular sector or market? An operator who’s had previous success in retail properties, for example, may not be able to succeed with an industrial property deal. Likewise, even sponsors familiar with a sector or geographic market can struggle in implementing a strategy that is new to them. For example, extensive redevelopment or value-add strategies require a different skill set than managing a stabilized property.

3. Management experience

Look for an operator with a management team with years, and preferably decades, of industry experience. Ideally, the team will have had success operating across multiple market cycles. This experience will provide better context and effective underwriting of new investments.

4. Investor reporting

No one likes to be left in the dark, particularly when entering into a long-term partnership in a relatively illiquid investment. Ask about the sponsor’s reporting procedures and technology. You should have confidence that you’ll receive regular, transparent, and understandable reporting on the performance of your investment. Ask to see copies of previous quarterly or annual reports and ask for references from existing investors to hear firsthand about their investment experience.

5. Sponsor co-investment/alignment

Lastly, and perhaps most importantly, be extremely cautious about any sponsor who is not investing significant personal capital alongside you. As a passive investor, you’ll want your partner to have “skin in the game” to ensure that your interests are aligned: they should profit when you do from the performance of the property – not through a complex or hidden-fee structure.

Your due diligence on a potential sponsor is likely more important than any individual investment transaction you might make. Though past performance is never a guarantee of future success, choosing a sponsor who can deliver on the five criteria listed above will help you have confidence in your partner.

Timberland Partners is a Minneapolis-based real estate investment and management company focused on the multifamily apartment sector. In business for over 28 years, Timberland Partners owns and operates a 17,000-unit, $2 billion portfolio across the central and southeastern United States. The company specializes in value-add investments across growing secondary and tertiary markets.

Their current offering, Timberland Partners Apartment Fund VII (TPAF VII) is seeking $100 million in non-institutional equity capital for making direct investments in 8-12 apartment communities across the central U.S. Since opening for investment in December 2019, the fund has raised $49.9 million.

To learn more, please contact our Director of Investor Relations, Sam Eaton at Sam.eaton@timberlandpartners.com, or call (952) 208-1999.

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