Key Takeaways
- Private equity real estate sponsors often struggle to gather structured and accurate information from property managers, leading to delayed and erroneous reporting.
- These parties specialize in sourcing investments, raising capital, and managing physical assets, but they typically do not have the resources or bandwidth to allocate to data collection initiatives that are crucial to the investor reporting process.
- Positioning an experienced liaison between the property manager and the sponsor can streamline information gathering and improve the reporting process.
In the private equity commercial real estate industry, the relationship between the fund or syndication sponsor and property manager is intertwined in many ways, but it becomes especially important when the sponsor requires information for investor reporting purposes.
Sponsors overseeing private equity real estate funds and syndications typically issue investor reports, including financial statements and long-form commentary, on a quarterly basis. In order to produce reporting that is informative for the investors, most sponsors look to gather data from the property manager overseeing the portfolio assets.
The Challenge
When drafting investor reports, it is a best practice in the commercial real estate industry to include information about property performance such as rent growth, occupancy rates, and delinquency trends. This information is obtained from the property management system, so the sponsor is reliant on the property manager to provide it. This is a relatively straightforward process if the sponsor maintains an in-house property management team, but it can be significantly more complex when a third-party property manager is involved.
Sponsors and property managers that operate independently often maintain different accounting, recordkeeping, and data practices. Additionally, at the outset of the relationship, these parties typically do not agree on a data transmission process to support investor reporting because both sides are understandably focused on operational activities. These dynamics can lead to two issues that hinder the sponsor’s reporting efforts.
- Insufficient or Inaccurate Information: Industry-leading investor reporting typically includes financial statements accompanied by a narrative about recent developments at the property and how these are meant to drive improved performance. Producing a reporting package of this caliber can only be achieved if the sponsor obtains accurate financials and all relevant supporting information. If this depth of information is unavailable or is not provided to the sponsor, then it detracts from the sponsor’s ability to present investors with a comprehensive update on their investment.
- Delayed Information Transmission: Timeliness is one of the keys to successful investor reporting. Most reputable sponsors implement a quarterly reporting cadence where reports are issued within thirty days of the end of each quarter. Producing reports within this period is a challenge, even when all necessary information is available. When property-level information is delayed, it can easily cause the sponsor to fall behind schedule.
How Lexcraft Advisors Helps Sponsors Gather Data from Property Management Firms
We’ve taken note of the struggles our clients face in gathering information for investor reporting, and we’ve crafted an approach to streamline the processes. Specifically, we serve as a liaison between sponsors and property managers to facilitate a smoother flow of information, ensure data accuracy, and shorten turnaround times. We focus on three key areas to help our clients obtain the information needed to produce high-quality investors reports.
1. Define Information Requirements
Every sponsor structures investor reports differently, so we take the time to understand exactly what information is required by the sponsor. This includes identifying the data that is needed, the required delivery timeframe, and the format required for reporting purposes. We communicate these requirements to the property manager in advance and work with them to get a head start on data collection.
2. User-Friendly Templates
Based on the information requirements agreed upon with the sponsor, our team creates templates to facilitate data collection and assists property managers with populating them. This ensures the necessary information is provided in an organized manner, it speeds up the data collection process, and it reduces the risk of inaccurate or incomplete information hindering the sponsor’s ability to communicate effectively with investors.
3. Obtain Systems Access
As expert users of investor management and property accounting software, our team is fully equipped to pull information directly from these platforms. In many cases, we partner with property management companies to gain the appropriate level of access to their systems. Our familiarity with the software allows us to access and organize the data quickly. By gaining the ability to self-serve on behalf of our clients, we can reduce the time required to gather information and ensure accuracy.
Final Thoughts
Many of the small and middle-market sponsors we meet remark that they spend too much time gathering information for investor reporting purposes. This distracts from important strategic decisions and capital allocation planning, and despite best efforts, often results in delays to the investor reporting timeline.
Bridging the communication gap between commercial real estate sponsors and property managers is crucial for improving efficiency and accuracy in reporting. By functioning as an intermediary, the Lexcraft team can mitigate risks and address inefficiencies that arise when sponsors undertake data collection initiatives involving third-party property managers. Ultimately, a collaborative approach mitigates risks and enables sponsors and property managers to concentrate on their core competencies—maximizing the value of real estate holdings.
Lexcraft Advisors is a fund administration provider that serves middle market real estate investment funds and syndications, typically with equity under management between $15 million and $150 million. Our team takes pride in providing general partners with reliable fund administration solutions often reserved for large, global investment firms. To learn more about our services, schedule a complimentary meeting with one of our Managing Partners.