Hey guys--I'm in the process of starting to do my own deals with one other partner. Generally speaking, we complement one another well and I want to be fair in creating an appropriate partnership structure. I have a good network in my market and believe I will be able to leverage a relationship with an investor that will provide most of our funding.
Providing the capital sources is clearly an important source of value to any partnership. What do you all think that contribution is reasonably worth relative to our venture?
Thanks for your insights.
I know this is not a direct answer to your question, but I would advise you to be very mindful about how you set this up. I would encourage you to let it take longer than you think it needs to. I've seen many of these types of partnerships eventually fail because one of the partners felt they were doing the majority of the work and their level of compensation didn't reflect that. it doesn't matter if it's two college buddies or a family office and an experienced developer. it happens to everyone.
It doesn't matter what WSO thinks that contribution is reasonably worth. It matters what your partner thinks that is reasonably worth. When I've seen this relationships stand the test of time there was a clear outline of everyone's roles and responsibilities. The income from those roles and responsibilities was carved up appropriately. Who will be underwriting these deals? Who will be managing these deals after closing? Is there a value add component that will need supervising who will do that? Is someone providing a larger share of the start up capital? All those are important factors to consider.
Thanks for your thoughts. That's a fair assessment. I was really trying to gauge some of your opinions on the value of providing the money partner relationship to the venture when all other effort/value inputs are being held equal 50-50 (ie, zeroing in on that single input). I will be sourcing the deals, managing a lot of the vendor relationships, doing most of the investor interface, etc. My partner will be doing most of the underwriting, market research etc. We both value our time input contributions as 50-50 and are 50-50 on the GP capital we will need to contribute.
If everything goes well it sounds like what you have proposed, in terms of the 50-50 split of effort and capital would work out well for everyone. The potential issues is the fund raising aspect. If you are bringing in the majority of the capital you should be compensated in some way (larger pieces of the promote/fees?). Unfortunately, coming up with a value on that is much more of an art than a science. Also what happens when the investor you have now become a much smaller piece of your capital stack? What if your partner finds a UHNW guy who can pitch in even more capital? That's obviously a great problem to have and there isn't one solution to this, but these kind of things have split long standings partnerships.
You really have two ways to address this.... As it's your capital sources you can take the lions share of the fees (60% - 70%) or you can split up the promote allocation (40% you/40% your partner/20% whoever brings in the capital or some variation on this). I think those are the two levers you have to play with so whatever you and your partner can agree on is what you should move forward with. Just make sure you document that very clearly.
I just began discussions with a small group of guys I know about this very thing. When the market turns we are each putting up $100k. Total funding of $500k in pursuit of small MF deals to start.
Because I'm a broker, I'd be sourcing deals. Probably not taking commissions because these will come from other brokers off market.
One partner is an agency lender and knows deals.
The third partner works for a family office with about $120mil AUM. He runs the whole thing and manages the property managers. He would be a great Secretary for the LLC and he would face most of the paperwork burden.
Figuring all this out can be tough. That's why we are starting small and early. It might take a year to iron all this out.
I've been sitting on some cash to put to work waiting for that to happen for a damned long time!
Remember you make your money when you buy.
Sometimes it works or sometimes it's not because When I've seen these relationships stand the test of time there was a clear outline of everyone's roles and responsibilities.
Any updates?
How hard is it to run your own deal? (Originally Posted: 08/26/2013)
Like many of you, I dream of someday going out, finding a partner or two, raising some equity, and buying commercial properties. Has anyone gotten to this point already? If so, how much experience did you have when you took the plunge, and what kind of experience? Did you have both property management experience and transactional experience? Do you think both kinds of experience are necessary to go off on your own, or can you use a third party manager and eventually learn along the way?
Management expertise is not necessary. By commercial properties, I assume you mean something like office/industrial/retail. A great building manager is probably not going to be the key. Maybe you're the only one who can bring some great tenant to the table and that's where your leverage comes from? Maybe you pounded the pavement, got there first, found a wonderful bargain and put it under contract before anybody else did? Maybe your value comes from the fact that you have 20 years experience developing a certain product type, whereas your potential partner doesn't?
Relatively easy, given how many idiotic crooks are in the industry (Trump, Kiyosaki). Quality is the issue.
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