Partnering With Property Manager?

Question

Hi Everyone,

How do you approach partnering with a property management team to do deals together? I'd like to give them a lot of the equity so that they're incentivized to keep the property up in exchange for financial help with the downpayment and for a lower management fee. At first, it would be for smaller commercial properties, but if the relationship grows well and we make a good team, I'd love to scale up with them.

Ideally it's a win-win for all:

For the PM:

• They get a large chunk of equity
• They get more business.
• They get access to my investors' capital for potentially future deals
• In a way, they eat what they kill

For me:

• I look favorable to the lender with an experienced PM team as a partner
• I'll get a deal under my belt
• I'll be able to get help with the downpayment, reducing the burden on my investors and myself

For my investors

• Sure, they lose out on some equity, but they'll get a (slightly) higher return due to the lower monthly management fee
• They'll sleep easy knowing that the PM has skin in the game and is experienced

To be clear, I'm playing the long game, so I'm more than willing to do say, a 55/30/15 split with the PM/Investors/Myself and with a 3-5% monthly management fee. I don't need to hit a home run.

I've heard that @JoeFairless talks about partnering with a PM company in his new book, but I haven't had the chance to read it yet. Thoughts? What am I overlooking? How does one approach a PM with this strategy? Thanks in advance!

Account Closed · Answer

It sounds like a great deal for the right management company. I owned a company in California and think this is well presented.

The main thing I think you need to look for is a company owned by someone who also owns property. Also look for a PM that currently handles the type of properties you are looking at.

You might need to approach a few to get one that is interested and capable, but you should be able to find one. And when you find the right one, they can probably be an asset to you in choosing your deals as they will have a perspective you might not have considered.

Lauren

Theo Hicks · Answer

First off, thanks for purchasing our book!

Now, for your question, here are four ways to partner with a property management company on your first deal

• Have them sign on the loan an offer them a one-time fee (as low as 0.5% to 1% and as high as 3.5% to 5% of the loan amount depending on how risky the deal and financing are and your existing relationship with them) and/or offer them a percentage of the general partnership (10% to 30%)
• Have them invest as a limited partner and offer them the same returns you offer your investors
• Have them bring their own investors
• Reduce the management fee in exchange for a percentage of the GP. For example, instead of charging a 6% fee, ask for a 3% fee. Then, since they are losing 3% each year, offer to double or triple that loss at sale.

Also, (and maybe I am reading your comment wrong) 55/30/15 split of the overall deal isn't how syndications are structured. Typically, the profits are split between the limited partners (i.e. the investors) and the general partner (i.e. you). For example, a 70/30 LP/GP split. So, you would be offering the management company a percentage of the GP. That is, a percentage of the 30%. If you offer them 55% of the entire deal, you're investors will get a maximum of 45%, which probably won't be enough to attract investors to the deal.

Tyler Kastelberg · Answer

@Snehann Kapnadak

Snehann: Contrary to most of the thread, I'm not a fan of giving equity to property managers. As a sponsor, I find it important to keep autonomy to remove and replace the property manager. When a PM has equity, this becomes more messy.

If you go this route, make sure you have a call option on their equity so you can cleanly end the partnership if needed.

Snehann Kapnadak · Answer

Great point @Tyler Kastelberg and I didn't even really consider that. Yes I'll be sure to throw in some sort of out-clause in the partnership contract. Thanks for the tip!

@Theo Hicks Oh okay, that makes sense. Thanks again!

Theo Hicks · Answer

@Snehann Kapnadak You are going to need someone with experience to sign on the loan AND an experienced management company.

Snehann Kapnadak · Answer

@Theo Hicks Ah okay got it, thank you. In addition to a having a person who meets this financial requirement I'm hoping that they'd also factor in the expertise of the property management team and help provide me with favorable loan terms.

Theo Hicks · Answer

@Snehann Kapnadak For commercial properties, a lender is going to want someone to sign on the loan who meets certain financial and experience requirements (for example, a net worth equal to the loan amount and liquidity of 10% to 15% of the loan amount at close, plus experience with a similar sized deal). If the property management company meets those criteria, great. If not, you will need to find someone else to sign on the loan with you.

Snehann Kapnadak · Answer

Fair point @George Hoover thanks for the feedback!

@Ellie Perlman Will do, thank you!

@Theo Hicks thanks for the clarity and outline. Super helpful. I'm leaning towards #1 along with #4, with reduced management fee. Do you think if they sign on the loan with me that I'd get more favorable lending terms? That's what I'm aiming for.

And you're right, I guess I meant a 55/45 LP/GP split, where the PM Company would get say, 60% - 70% of the GP portion and I'll keep the 40 - 30%.

Ellie Perlman · Answer

@ Snehann Kapnadak I think it's an interesting approach. Joe Fairless did exactly that to close on his first deal. I know a PM company who partners with syndicators for equity. Shoot me an email or a message here on BP and i'd be more than happy to help!

George Hoover · Answer

Snehann,

Great idea! However I would have to know you really really well to jump into a partnership. We may end up spending too much time on legal fees and operating agreements than we care to. So it would really have to be an incredible opportunity to do so. You may be able to achieve the same outcome with a good management agreement in place.

All the best!

Partnering With Property Manager?

Partnering With Property Manager?

Most Popular Reply

13 Replies

@ Snehann Kapnadak I think it's an interesting approach. Joe Fairless did exactly that to close on his first deal. I know a PM company who partners with syndicators for equity. Shoot me an email or a message here on BP and i'd be more than happy to help!