Lenders don't like empty buildings, they like strong sponsors
I don’t want to throw anyone under the bus so I won't name names, but it’s not uncommon to see a post in real estate investing forums or on social media that goes a little something like this:

&gt;*Them:* Anyone financing unoccupied commercial properties in NJ? I have a client with a contract for a 6 unit residential building that needs financing.

If I see a post like that, and I have 30 second to spare, I may respond with something like:

&gt;*Me:* I don't think any lender has interest in vacant buildings. What they may have interest in is a strong sponsor that knows how to take a vacant buildings and redevelop it. Has your client executed this type of play before?

I don’t think I need to belabor this point into a long blog post. I think most of you get it. Lenders are looking for low-risk deals, and that means cash flow that covers their loan payments.

The other way to de-risk a deal without current cash flow is by partnering with a strong Sponsor. Details about a sponsor, or their deal, need to be communicated succinctly to gain traction with people who can really transact. There are SO many deals, and a limiting factor is attention. Lenders and investors spend their time with experienced sponsors that can communicate their business plan efficiently. Nothing else makes sense in the commercial lending business.

## What is the Sponsor’s role, really?

If you’re just getting started in commercial real estate, the term “sponsor” could be a bit confusing.

In other industries or in daily consumer life, the word “sponsor” makes you think of a company bankrolling an event. Like a company “sponsoring” a bowl game — they pay a lot of money to have their name on something.

But in commercial real estate, “sponsor” means almost the opposite. The sponsor controls a deal, typically through an agreement to acquire a property, but then typically solicits other capital to finance it. Sometimes sponsors may have little of their own skin in the game. The majority of the capital, if not all, will come from lenders and investors.

So a deal sponsor *can* bring cash to the table, but it’s not their defining action. So what is?

#### Control of a deal

The most defining trait of a sponsor is control of a deal. If “deal” is confusing, then think of it as control of an investment opportunity. Often this means a property under contract for an acquisition, or a new development.

#### Control of a COMPELLING deal

Anyone can gain control of a deal, but why? If you offer to buy a property at twice what it is worth, what’s the point? There won’t be an investment return, and in an efficient market, the sponsor will never attract capital.

In the case of a vacant building, there’s nothing compelling about the current financial picture of the asset. What can be compelling is the opportunity for improvement, which is largely driven by the quality and track record of the person/team operating the deal and adding value — through CapEx, leasing, etc. A compelling deal is at the intersection of the asset and the person operating that asset.

So the deal must be compelling, at least to someone.

#### COMMUNICATION of a compelling deal under control

This deal must be compelling to *someone*. The sponsor’s really critical work is communicating the right information about the deal to the right someone. So that takes the right presentation, and it takes the right audience.

Right Presentation: Calculating the numbers to reveal a great deal in your own mind without being able to tell that story in a compelling way makes you an analyst. That’s fine, we need analysts. But great sponsors can not only calculate what makes the deal worth their time, but can then *tell the story* of why it is so.

Right Audience: Some investors are risk-averse, and like the predictable returns of low cap rate, stabilized assets. Others are searching for high yield and willing to tolerate risks. The same goes for lenders, each one has their own appetite for risk and yield.

Telling the compelling story of a great investment opportunity, to the right people who trust you, makes you a deal maker. Therefore great real estate sponsors are relationship builders and story tellers.

That vacant multifamily building in New Jersey might be a great investment if underwritten well, and pitched by the right sponsor, with the right track record, to the right audience.
[{"id": "gmmfggj", "text": "I love reading your posts here and your contributions are very helpful.  Thank you very much!", "replies": [], "depth": 1}, {"id": "gmmhbgb", "text": "I\u2019m here for this content. As a real estate exec and educator, I can tell you\u2019ve been around the block a time or twenty. This is exactly what young people (and old people, myself included) need to hear and remember while trying to improve themselves in industry.", "replies": [], "depth": 1}, {"id": "gmmhoq5", "text": "Demonstrated track record of successfully completing similar projects along with the financial wherewithal to support the loan in case it goes sideways is the definition of a strong sponsor. The ability to \u201ctell a good story\u201d is broker talk.", "replies": [{"id": "gmmrrvb", "text": "Demonstrated track record = strong sponsor. **Agreed**\n\nFinancial strength... = strong sponsor. **Disagree**. That's a strong *guarantor*. You need a strong guarantor for risky loans, and it's *often* the sponsor, but the role is different.\n\nA strong sponsor can get a strong guarantor on board.", "replies": [{"id": "gmmvd1c", "text": "Thanks for starting this conversation about Sponsor financial wherewithal. This is a common misconception brokers/deal makers/CM/etc. get very, very, **very wrong when presenting deals to lenders**.\n\nA Sponsor who *doesn\u2019t* have the financial wherewithal to support the loan in case it goes sideways is a **mediocre**, at best, Sponsor. \n\nYou cannot be a strong Sponsor without strong financials. You can be a mediocre Sponsor if you have a good track record and can bring a financially strong guarantor on board. \n\nDon\u2019t get me wrong, we\u2019ll still do the loan and all, but you have no idea the amount of tap dancing I have to do to get bank management on board with a Sponsor who is either not financially strong or won\u2019t provide their financials (typically one and the same, but not always).", "replies": [{"id": "gmnjfhv", "text": "Different types of lenders are going to see this issue differently. A debt fund doesn't care about sponsor financials the same way a bank does, and a CMBS contributor hardly cares at all. A private bank cares about this above all else. Beauty in the eye of the beholder.", "replies": [{"id": "gnmz5we", "text": "Thank you. /u/SF_Lady is unfortunately only seeing things through the lens of being a banker.", "replies": [{"id": "gnmzvpw", "text": "Bankers do provide the majority of financing, and yes, that is my area of expertise, so thank you for highlighting that. Much appreciated.", "replies": [{"id": "gnn0yzv", "text": "I was highlighting the fact that there are more types of lenders than just bankers in the world\u2026\n\nTypically I agree with your posts but on this one I\u2019m in disagreement as a strong sponsor can have a good work history and a net worth below the loan criteria with a strong guarantor. We have a deal right now that they\u2019ve absolutely crushed the business plan on a setup like this. We\u2019re underwriting another deal for the same group currently.", "replies": [{"id": "gnn2hga", "text": "We\u2019re both on the same page, my friend, at least from my end. \n\nA solid transaction set up properly simply makes the sponsor wherewithal irrelevant. It\u2019s an afterthought mentioned in passing in a meeting.", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "gmnm8wb", "text": "The story is not broker talk. It\u2019s communication 101 and as OP said, communicating the vision/story absolutely critical in raising capital from new LPs.", "replies": [{"id": "gmnvjo1", "text": "I tend to agree with SF_Lady's assessment. I'm a seasoned vet in the CMBS space and related sectors...this whole idea of telling a story is just an antiquated notion by all the old folks in the industry. And there are a lot of them in CRE. It's the equivalent of those old scouts in \"Moneyball\" who think you can judge a baseball player based on things completely unrelated to baseball.\n\nThere were a lot of retail sponsors telling stories about how they plan to bring in a great anchor tenant to their mall over the past few years. Guess what actually happened in reality?\n\nI've always felt CRE was due for a paradigm shift - all of these backwards ways of thinking would eventually be overtaken by smarter, more intelligent investment approaches. I think we're already seeing it, largely driven from the private equity and hedge fund space. There's a greater focus on population data and demographics and corporate credit and other quantifiable aspects of a deal.\n\nThe hedge fund I work for operates very much like this. Our REPE team gets so many calls from dinosaur brokers who like to just yip yap and say nothing of actual substance.", "replies": [{"id": "gmnzei3", "text": "I believe we\u2019re on the same side here. To me, \u201ctelling a story\u201d means connecting the quantitative data points and effectively communicating the fundamentals which make an asset, market, etc worth investing into. Sounds simple enough but there\u2019s an art to it when it comes to raising capital in a boutique development shop. \n\nCompletely agree with you on the dinosaurs brokers bit. Those guys are the worst.", "replies": [{"id": "gnmzqzr", "text": "As a lender - unless I know and like you I\u2019m not picking up my phone to talk about a deal to review until I have an overview of the deal in my inbox with a proforma / deal history / sponsor info / T-12 etc.\n\nI\u2019m dealing with a \u201cmortgage broker\u201d right now who sends me an email the other day that said \u201ccall me to talk about this deal\u201d with literally no information. I wrote back \u201csend me some info that I can look over please to make sure I have an understanding of it\u201d to which he then writes back \u201cjust give me a call and we can talk about it.\u201d\n\nBitch no - I\u2019m not giving you a call and you aren\u2019t in charge of this process. If you can\u2019t send me something I can use before getting on the phone we already aren\u2019t seeing eye to eye and there\u2019s no way I\u2019m wasting my time on you - I don\u2019t care how good your deal could have been.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gmmi2zw", "text": "Definitely a message that needs to be shared. Would you be interested in doing a legal/lending video recording?\n\nI discussed a lot of the same concepts for an industrial building I'm under contract on. What is the play? WHY does it work? Why should the lender take on this 75% LTV risk? (its a STNL, occupied, but still :))", "replies": [], "depth": 1}, {"id": "gmmnvmc", "text": "Sounds like a wordy bridge loan.", "replies": [], "depth": 1}, {"id": "gmms00b", "text": "Helpful info, thanks.  What are the most key things to include in a business plan for a project?", "replies": [{"id": "gmmsvea", "text": "\\- Full pro forma underwriting\n\n\\- If there's construction or major capex, detailed break-down of the budget\n\n\\- Property details (size, location, construction, year built, any major renovations)\n\n\\- Rent comps\n\n\\- Sales comps\n\n\\- Something to demonstrate track record\n\n\\- Guarantor's net worth and liquidity\n\n\\- Succinct write-up describing the play", "replies": [{"id": "gmmua4s", "text": "For the rent/sales comps.. is that data usually free or do you usually have to pay for it?  Best places to get it from?", "replies": [{"id": "gmnjio6", "text": "Depends on the asset type. DM me for more detail with what you're working on.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gmnfc3p", "text": "I feel attacked that you used NJ in your example. But still, solid points", "replies": [{"id": "gmnj4ze", "text": "Haha - I live in NJ too!", "replies": [], "depth": 2}], "depth": 1}, {"id": "gmo5pe3", "text": "Well said! I'd like to mention that equity and debt brokers can be quite helpful in helping you present your deal in the best light to the highest value audience. There is often enough work involved in finding, controlling, modeling, and developing a deal that it can be helpful to have a good consultant who can work on getting you solid introductions.", "replies": [{"id": "gmpbzkj", "text": "I totally agree. And it's not just for beginners. The better the athlete, the more coaches and trainers they employ. A Capital Advisor is one of those specialists that can help refine and then scale the effort.", "replies": [], "depth": 2}], "depth": 1}]