If you’re an outsider looking into the commercial real estate world, you may think those business people who are buying commercial real estate assets are called “investors.” You’d be right, to an extent. At the end of the day, the individual buying the asset is “investing” their money.
What’s the Difference Between a Sponsor vs Investor?
You may also correctly believe that a sponsor is someone who donates funds to a cause. “She sponsored the event last night in honor of her brother’s wedding.” However, upon entering the world of commercial real estate, you’ll quickly realize these words have a completely different meaning.
Almost all commercial real estate transactions consist of three fundamental components:
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The individual or group who is seeking out the opportunity and putting it under contract: aka “the sponsor”
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The bank or financial institution that offers a mortgage on the property: aka “the lender”
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The investors who partner with the “sponsor” by supplying the investment capital needed to close on the asset: aka “the equity” (just like a mortgage on a house, there’s a significant amount of money (equity) that needs to be supplied on top of the funds offered by the mortgage lender
Example of Sponsors vs Investors
Here’s an example: XYZ Acquisition Corp. puts a $10M asset under contract. They go to the lender, and the lender offers 6.5M of debt to aid in the acquisition of the asset. It will be rare to find an individual who has 3.5M of the spare change needed to buy the opportunity, so XYZ Acquisition Corp. must now find investors to bring $3M more of capital to the table so they can close the deal. In this case, XYZ Acquisition Corp is the “sponsor,” and the individuals (often many) bringing the remaining $3M are the “investors.” Therefore, in commercial real estate lingo, the “sponsor” is the individual or group who brings the opportunity to the table. They sponsor the opportunity, and present it to both the lender and the investors.
Sponsors and Investors Both Support CRE Deals
If the sponsor can convince both the lender and investors to get on board, they have a deal. If not… well they may just have to pass up on the opportunity.
