SPONSOR EVALUATION CHECKLIST
The Sponsor Evaluation Checklist will help you elicit useful information on the dynamic condition of the organization and the actual operating policies followed—especially important in light of the rapidly increasing scale of operations of most Real Estate Private Partnership partnership sponsors.
Sponsors should have answers readily available because they are accustomed to addressing these important issues in presentations to other investors. Also, the typical due diligence investigation will zero in on these areas and many others.
When you are considering several different partnership options, you can use the Checklist as your interview outline. When you ask the right questions, the people you are dealing with will respect you and will realize that they have to give you straight answers. Remember, as a potential investor or advisor, you're entitled to answers for all of the following areas of inquiry. Depending on the answers, you should start recognizing qualitative differences between the sponsors you are investigating.
The Sponsor Evaluation Checklist is divided into five parts:
The Sponsor Evaluation Checklist is divided into five parts:
I. Senior Management
The Checklist describes the founders, senior officers and key individuals. Such areas as education, experience, employment history and compensation are covered. An organization chart will also show changes in personnel and key functions in the last two years. You'll have an idea of longevity and stability of the executive corp. The conflicts of interest policy will be described.
A. Indicate principals, senior officers and key acquisition and property management department personnel. List the following information for each individual:
1. Name, title, age, education and credentials, percentage or nature of ownership.
2. Years with the company, years in present position, personal relationships with others in management.
3. Previous employment history, past or present positions (directorships, associations, government bodies).
B. Describe nature and basis of incentive compensation and employment agreements.
C. Provide organization chart, indicating changes of personnel or key functions in last two years.
D. Describe conflicts of interest policy relative to limited partnerships.
II. Organization & Procedures
Information on the sponsor organization, subsidiaries, affiliates, and cross ownership is presented. The history of the business and its current size are described. Operating policies concerning origination of property acquisitions, property management, investment decision-making and investment criteria are outlined. If it might be available from prior transactions of the sponsor, a set of investor communications and reports is requested so you can judge the adequacy of passive partner reporting.
A. State the legal form of the firm (corporation, partnership), and include a chart showing parent companies, subsidiaries, and divisions, with ownership noted. Indicate ownership by outsiders.
B. State the location of headquarters and list other offices, indicating primary purpose of each (acquisition, marketing, etc.).
C. Indicate the current number of employees in total and in each functional capacity. Compare with one year and three years ago.
D. Give a description and history of the business, and state what distinguishes the company from its competitors.
E. Describe operating policies. How do you originate acquisitions and what are your investment criteria?
Describe the investment decision-making process. How do you manage properties and resolve conflicts of interest between competing programs?
F. List major program, organizational and acquisition policy changes in the last three years.
G. Provide the latest management letter from your independent accountant.
H. Provide a set of investor communications and reports for a previous partnership and describe how you deal with investor complaints and requests.
I. Describe your marketing staff and the type and level of assistance provided to a broker/dealer.
III. Financial Condition
Solvency, liquidity, sponsor net worth and material adverse events are uncovered here. "Solvency" refers to the change in the balance sheet over several years and any contingent liabilities or other contractual obligations and guarantees. Working capital, lines of credit, borrowing capacity, debt maturities and cash flow projections make up the "Liquidity" portion. In the event the partnership has an entity (Corporation or Limited Liability Company) serving as the Managing Member, the calculation of "Net Worth" to meet the IRS "safe harbor" test is requested. The "Material Adverse Events" portion deals with litigation, bankruptcies, foreclosures and defaults at both the sponsor and partnership level.
I. Balance sheet for last three years.
2. Contingent liabilities, unfunded contractual obligations; indicate security or guarantees for loans.
1. Working capital.
2. Credit lines, borrowing capacity and name of major
3. Near-term debt maturities.
4. Cash flow projection for next 12 months.
C. Net Worth
Show the calculation of the net worth requirement and adequacy of net worth for "safe harbor" purposes if there is a sole corporate managing member or lead partner.
D. Material Adverse Events
1. Litigation, convictions, recision offers.
2. Bankruptcies, foreclosures, defaults, forced liquidations.
3. Discuss events, causes and results of accommodations with creditors at the limited partnership level.
IV. Performance Record
This section shows types of offerings and properties purchased in the past, the size and number of partnerships, and the amount of properties purchased. Acquisition activities anticipated for the current or succeeding year are compared with past levels. Information is requested on the success and efficiency of fundraising and procedures followed for private placements.
A. Areas of expertise
Kinds of offerings, typical objectives, types of property, locations.
Total no. of projects for the current year and per year for at least the last five years:
1. Number of partnerships and amounts raised in total, and in public and private offerings.
2. Number of participating investors.
3. Number and gross price of properties and units purchased.
C. Plans and Events
Number and gross price of properties to be purchased, and total equity to be raised and invested in the current or succeeding year.
1. Average months between offering date and closing date.
2. Amounts raised as percent of amounts offered.
3. Average months between closing date and full investment of proceeds.
4. Average months between closing date and beginning of cash distributions from operations.
5. Number of months, if any, in the last two years that you had two or more programs with similar objectives and criteria competing with each other for acquisitions.
E. Private Placements
Ask of the sponsor's procedures for marketing private placements and furnish opinion of counsel that private placements in past year did not require registration. The sponsor may not have gotten a legal opinion, but likely had a securities attorney involved in prior PPMs. Simply ask for a couple of the prior PPMs where you can confirm this detail.
F. Recurring Investor Participation
Indicate percentage of repeat customers (investors participating in more than one offering).
V. Industry Standing and Reputation
Outside parties with whom the sponsor deals are enumerated. The list includes attorneys, accountants, independent directors, stockbrokers, lenders, co-developers, joint venture partners, major tenants, appraisers and other outside consultants. A description of litigation and disputes with the IRS is requested.
A. Legal & Accounting Advisors
List attorneys and accountants names and affiliations of independent directors and state changes and reason for changes in the past five years.
B. Investment Sales Advisors
List major broker/dealers and changes in the past three years.
C. Lenders, CRE Brokers, Property Sellers
List major institutional lenders, and other major property sources.
D. Appraisers, Advisors or Mentors
List major appraisers or other outside consultants.
E. Tax Disputes
Describe significant disputes with the IRS and their resolution.