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Updated over 6 years ago, 05/31/2018
Property Management Company taking part of a deal?
@Craig Garrow how are they taking that piece? As in they are owning 10% of it?
Where have you heard that?
The "skin in the game" should be that the PM doesn't get paid if the owner doesn't and get's fired if they do a bad job.
How is a client gifting equity to a vendor "skin in the game"? The incentivization is backward here.
I ran a PM company for a number of years and it's hard enough to get owners to pay for required repairs, let alone giving me part of the property.
Hi @Craig Garrow, yes, that's a thing. It helps align goals among all the people involved in the deal. @Joe Fairless has done it multiple times already so I'll tag him here so he can contribute.
Yes, that strategy was discussed in one of the podcasts recently. I believe it was #202 with Mark Walker. He mentioned partnering with his PM on a deal and thought it was a win-win since the PM had a vested interest in controlling costs and maximizing the performance of the property.
But I do believe it was a PM that he had worked with for several years so there was an established relationship and trust already there.
Gifting the PM a piece of the deal doesn't align their interest. Requiring the PM to contribute cash to equity, tying their PM fee to performance / shareholder distributions, etc does. I'd also be looking for them to be willing to step aside if not performing, and potentially have them sign on the note.
Wow, thanks for all of the feedback so quickly! I'm currently listening to the BP Podcast #203 and it was mentioned here, and I can't remember where I've heard it before - might be Kevin Bupp's podcast.
I just thought it was pretty innovative. I'm absolutely of the belief that the PM's compensation should be tied to the performance of the property regardless of any ownership interests.
@Craig Garrow I don't know if it's common but as @Michael Le said it's something I've done with a property mgmt company on multiple, large apt community deals. It varies what each of you give/get. Some of the things I've done on deals:
They get:
- equity in a deal
- A new property to manage
I get:
- someone to sign on a loan with me (if they have a large balance sheet and good liquidity and you don't then this is a good strategy for starting out)
- alignment of interests on mgmt (since they now get upside)
- additional equity in the deal (if they raise it and/or invest in the deal themselves)
But, proceed with caution:
As @Carlos Flores said, you need to be able to fire them as a property mgmt partner if they don't perform. However, even if you do fire them as mgmt company, you'll still be partners with them on the General Partnership side (unless you buy them out), therefore, choose your partners wisely on who you offer this to.
Net-net, it's a great way to solve some challenges you might be coming across (ex. not enough equity, can't get approved for loans, etc.) but as with all good things there are potential downsides (ex. if they go AWOL and you have to fire them then it would get messy).
Joe Fairless I can definitely see where there could be benefits and potential issues that could arise. How does the compensation structure work? Say, the PM has a 10% equity interest, are they also paid a reduced management fee?
I have myself have never seen a PM take part of a deal. How my company keeps the PM incentivized is we only get paid on rented units. If the unit is not rented we don't get our percentage. Also we don't do Leasing fees. In my opinion leasing fees is almost like double dipping. Plus why incentivize the PM to have high turnover so he/she can get more leasing fees? Interesting topic though I would never do a deal like this unless you know the PM and trust him. What happens if he does a really bad job and you want him out? Do you buy him out? what if he wont sell? I think their are way too many ifs in this scenario.
I own a PM company and we've done a few deals similar to this: One is where an owner is out of cash and needs to do significant renovation/repairs. Rather than him lose the property and we lose a door to manage we stepped in as an equity partner with ownership. Our cash, we handled repairs/renovations and he gave up a % of ownership. We still charge all our normal fees to the now new partnership but so far it's worked well.
Had another where we agreed to severely reduced (almost free) management for equity participation. Owner gets free or almost free management; PM gets an equity percentage for his balance sheet and potential future upside in value.
There have been a few comments on how the PM company is motivated to do a good job because they get collected rents, but literally that is only half of the equation. By investing 10% with investors a PM would want to increase rents, and decrease expenses. A typical plan would be to invest two years on rehabs etc to increase income and decrease expenses, show stabile numbers for 3 years and the take equity out and reinvest in another building. If the PM is onboard with than they will look for more ways to increase/decrease.
We are always open to being in any deal when we are the buyers agent. It's a great way to be partners with the same goals.
this concept is blowing my mind. fyi.
@Robert Gilstrap how did you structure your deal with the investor? Does the contract allow for one or the other to buy the other out? Do they receive any income or does it all go to the repairs until paid off then it adjusts?
@Craig Garrow don't mean to hijack the thread, but this is fascinating.
@Tyson Hosey on the first one we stepped in as 50/50 owners in return for the renovation. It was a duplex, the guy didn't really have any equity but we're always looking for long term upside so that was OK with me. We split all income and expenses after that initial rehab. Has worked out pretty good thus far. I think he was just in a bad spot financially and couldn't stomach the major expense. We see that a LOT in the PM business. I have bought many properties from owners that we manage for because they just wanted out in a big way.
@Robert Gilstrap Interesting! I think I'm going to work out a few scenarios to see if they make sense in my situation.
@Craig Garrow it all depends on what you want to get out of the deal and what they are looking for. I've never had reduced the property mgmt fee, I've done the things that I listed in my post above.
I was just thinking of this again and would love to get some more input! Apologies if this is redundant, but I've got an owner with whom I may be able to structure something similar to this with.
Unless you know them really well, I would start with just giving a percentage of the NOI.