Do you pick the sponsor first or the market first?

Sponsor first, and it isn't close for me. I own a 12 unit and a 6 unit, so I get to see how much of an outcome is made by the person answering the phone at 9pm. Two buildings four blocks apart in the same market can run seven points apart on expense ratio depending on who's managing turns. As an LP you're buying that difference and you can't inspect it after the fact. The market gives you a range of outcomes. The sponsor picks where in the range you land.

The part I get stuck on, @cairn, is how a first-time LP judges sponsor quality at all. I can read a market. I can pull permit data and drive it. When I look at a sponsor I get a deck that says 24% average IRR across the portfolio and I have no way to know what's in the denominator. Do you ask for the deals that lost money by name? Does anyone actually answer that?

You both skipped the fee stack. I put an hour into two offering docs last month and the difference between them was roughly two points a year of my money before anyone argues about the market. Acquisition fee, asset management fee off invested equity versus off gross assets, disposition fee, a refi fee I hadn't seen before. I'm not saying screen fees first. I'm saying a great sponsor in a great market with a fee load that heavy is still a mediocre outcome for me, and that's a thing I can read on paper today rather than guess at.

Market first, and I'll take the unpopular side properly. I do land, so my time horizon is long and I've watched good operators get flattened by things they had no control over. Job base leaves, an insurance market reprices, a county changes what it will approve. None of that shows up in a sponsor's track record because it hadn't happened yet when they were racking up the wins. A sponsor's record is mostly a record of the conditions they operated in. If you screen sponsor first you end up rewarding people who bought in 2014 through 2019 and calling it skill.

Genuinely basic question and I'll take the hit for asking it. When you say the sponsor picks the market, does the LP have any say at all? Or does the sponsor find the deal, decide the market, and my only choice is yes or no on that one deal as presented?

@rigging yes, that's it. You get a binary on a specific deal that has already been chosen, priced and usually already under contract. That's why the order question in this thread matters. Since you can't influence anything after the wire, all of your judgment gets spent in the window before it.

My own order has ended up being sponsor, then market, then terms, but I check the terms in a way that can veto. Meaning I decide whether I like the operator, then whether the market makes their plan plausible, then whether the split leaves enough on my side for the risk. Any of the three can kill it. Only the first one can start it.

I manage these properties and see the same sponsors from underneath, and @parcel's version doesn't match what I watch. Two owners, same submarket, same vintage, same year of purchase. One holds 94% occupancy through a rough leasing spring and the other sits at 82% because they wouldn't approve the concession or the make-ready spend fast enough. Same market conditions, completely different result. Markets set the weather. Operators decide whether the roof leaks.

Sponsor first for a reason nobody has said yet: a sponsor worth backing will not take you into a market they don't know. Ask the question directly. How many doors do you own within an hour of this one, what's your management setup, who walks the property on a Tuesday. If the answer comes back that this is their first asset in that metro, you've learned something about the sponsor rather than the market. The market question answers itself once you push on the operator hard enough.

My list is currently nine sponsors and I've committed to none of them, so take this as a screening order and not a results claim.

1. Does the sponsor have a full cycle deal, meaning bought, held, sold, capital returned. If no, they go in a maybe pile.
2. What did they do in 2022 through 2024 when rate caps repriced. Distributions paused, capital called, refi that didn't happen. I want the ugly one described in their own words.
3. Then market and business plan.
4. Then the waterfall and fees.

@tally I moved fees to fourth on purpose, because a fee load I hate is a fast no anyway and it takes ten minutes to check.

Running a small crew has made me think about this the way I think about hiring. I can teach someone a market in six weeks. I cannot teach someone to call me the day a job goes sideways instead of the week after. That trait shows up in the first bad week and never after. So I'd screen for it first, whatever it costs in the deals I pass on while I figure out who has it.

Six months of this and zero checks written, so I'm the cautionary tale for the ordering debate. What I've noticed is that market-first keeps me busy and sponsor-first keeps me honest, because market work always produces more work, and there's always another submarket report to read. The sponsor questions have endings. You ask about the full cycle exits, you ask about the deal that broke, and either you get a straight answer or you don't. @lantern I'd rather be stuck on a question that terminates.