What Passive Real Estate Investors Should Demand from Their Sponsor
Over the years, I’ve seen countless real estate deals come across my desk, many of them packaged with pitch decks that are sharp, professional, and full of promise. The IRRs are sky-high. The story feels bulletproof. The asset class is ‘hot’. And the proforma always seems to point to a big win.
But here’s the truth: most of the time, the difference between a good deal and a bad one isn’t in the deck, it’s in the assumptions.
A spreadsheet can tell you anything you want to hear if you ask it the right way. The real test of a sponsor isn’t how the deal looks on paper but whether they’ve historically been right in their underwriting.
The Illusion of the Pro Forma
In today’s market, it’s easier than ever to build a “great-looking” model:
- Inflate rent growth expectations
- Compress the lease-up period
- Ignore potential delays, overruns, or tenant churn
- Cut reserves or expense assumptions to juice cash flow
Anyone can present a 20% IRR by pushing the right variables around. But that’s not a strategy, that’s a sales pitch.
What Smart Passive Investors Should Actually Be Looking For
If you’re evaluating a deal as a passive investor, here’s what really matters:
- Track Record
Ask for actual results, not just marketing slides. What were the projected returns on previous deals, and what actually happened? Can the sponsor walk you through where they were accurate and where they missed?
- Transparency of Assumptions
A strong sponsor will share the full pro forma, including the detailed assumptions behind every number: rent growth, operating expenses, vacancy expectations, lease-up timing, and exit cap rate.
- Stress Testing
Ask to see a downside case. What happens if rents stay flat? If interest rates rise? If construction takes longer than expected? Quality sponsors model this because they know things rarely go exactly to plan.
- Aligned Incentives
How are fees structured? Are there preferred returns and catch-up provisions? The structure should reward the sponsor for performance, not just for putting the deal together.
- Communication and Reporting
Once the deal is live, how often will you get updates? Are the updates comprehensive? Will they share financials? Will they explain variances from the pro forma clearly and directly? Or will you get silence when things go sideways?
Common Red Flags
These are signs you should dig deeper or walk away entirely:
- The IRR looks too good to be true (and no downside case is offered)
- The sponsor can’t show any historical performance
- Assumptions are vague or generalized with no backup
- Heavy use of financial engineering (preferred equity, mezz debt, or hidden developer fees) without clear disclosure
- No sponsor equity in the deal
If the deal relies entirely on perfect execution to hit its targets, it’s not a deal, it’s a gamble.
Our Approach
At NorthBridge, we typically underwrite deals with a 5-year hold period. That doesn’t mean we’re locked into that timeline. Market conditions may present an earlier or later exit, but it gives us a realistic framework to model rent growth, expenses, lease-up, and return expectations.
We underwrite conservatively, build in contingency, and test how our numbers hold up in less-than-ideal scenarios. When we bring a deal to investors, we share the model, not just the highlight reel. And once the deal is live, we deliver regular quarterly reporting, including variances and explanations.
If we miss, we say so. If we beat our pro forma, we explain how. It’s about treating underwriting as a discipline, not a sales tool.
Final Thought
If you’re a passive investor evaluating a real estate opportunity, don’t let the marketing flash distract you. Focus on the fundamentals. The quality of a sponsor’s underwriting, the honesty in their assumptions, and their ability to perform over time will matter far more than what the IRR says on page three of the pitch deck.
Ask the tough questions. Demand the details. And partner with sponsors who view your capital the same way they view their own: with caution, respect, and accountability.
