Investing

What is a crowdfunding sponsor?

Find out what a crowdfunding sponsor is and what to look for in one.

What is a crowdfunding sponsor? July 25, 2020

In a crowdfunding deal, a sponsor is an individual or company that identifies a real estate project. The sponsor is the lead who finds and evaluates the opportunity, facilitates the purchase of the asset, oversees the management and eventual sale of the asset. 

The sponsor brings their expertise and sweat equity in finding, managing, and running an asset of this class. Essentially they do the heavy lifting so the investment becomes a passive income to the individual investors. 

The sponsor’s responsibilities include

  • Due diligence of the investment.
  • Create a business plan and exit strategy.
  • Management of the property.
  • Handle the financial like distributing returns to the investors

How the sponsor gets paid

There are two ways a sponsor gets paid: acquisition fees and sponsor return. Acquisition fees are a one time fee paid to the sponsor upon acquisition of the property. Standard acquisition fees range between 1-2% of the investment amount. 

The sponsor return is a way of compensation based on the performance of the investment. How this works is a preferred return is paid to the investors before the sponsor is paid. If the return is over that threshold, a certain percentage of the return is paid to the sponsor. 

Suppose, the preferred return of the deal is 10%. This means the first 10% will go to the investor before the sponsor gets paid. Over 10%, the sponsor is entitled to the returns of the deal. This way, the sponsor is incentivized to generate as many returns as possible for the investors. 

How to evaluate a sponsor

The sponsor plays an important role in the crowdfunding deal so it’s imperative that the sponsor is highly qualified. Most crowdfunding platforms vet the sponsor but you have to do a background check if the person managing your funds is reliable and experienced.

  • co-investment in the project
  • experience of the sponsor with the asset class
  • performance of prior projects

In short, the sponsor is a critical factor that determines the success of the project so its important this person has a proven track record.