Need some guidance!

[Craig Garrow]

I had what sounds like it could be a pretty unique opportunity come up yesterday, and I’d like to see if I could get a little feedback! I just spoke to an investor that has two commercial buildings here in town. One has an office and two apartments, and the other has two apartments and room to build out two more. Initially, he was looking for a PM, but as we got further into the conversation, he told me that he is in the process of trying to buy his current partner in the project out, and would like to take on a new partner. As he puts it, someone with some skin in the game will manage the property more closely. So, I’ve heard of situations where the Property Manager takes a small ownership interest (say, 5-15%) in the Property they manage as compensation, sometimes with a reduced management fee, or no management fee. Has anyone had any experience in this, or how to go about setting it up? Some sort of partnership? This situation seems like it could be a good fit, assuming everything checks out after some due diligence. Thanks in advance for any advice!

[Scott Skinger]

I agree with @Account Closed, first ask a lot of questions about the current situation, the "bad" partner, his goals with the project and what he thinks a "good" partner would be like. Figure out his expectations. You never know, the partner you are speaking to may be the bad one.

More specific to your question, regarding you becoming a property manager/owner I would suggest first figuring out what you want out of this deal. Think about it this way. At some point your ownership will translate into $. A typical structure might pay you quarterly dividends and then a larger payout when the property sells. WHEN it sells might not be satisfactory to you. What if you want your $ in 3 years and the majority owner doesn't want to sell for 10 years or ever? Or IF it sells. What if the building is on the market for a couple of years and either doesn't sell or sells for a small profit? This might be satisfactory to the majority owner but you may have slaved away for 5+ years for a small quarterly dividend and a small payout at the end.

This is the same thing as stock options, or phantom stock in a company. Many people are allured by "ownership" or the big lottery winning payout at the end. This rarely happens. At the end of the day, this is just a math problem. "If I make $2000 quarterly on dividends and then we execute on our plan to sell at x in 5 years, my share will be $40K in dividends over 5 years and $50K in profits from the sale, $90K total. I will have invested 10 hours/week for 40 weeks/year for 5 years, 2000 hours. I'm making $45/hour for my time." From there it is up to you to figure out whether the $, time, opportunity cost and learning experience makes this the right opportunity for you.

If you get involved in a partnership like this where you have equity, especially where the majority of your compensation is tied up in equity, you HAVE to know what the majority owner's plans are, you have to be in sync and you have to believe that it will work. If the current owner doesn't want to share this with you or is fuzzy on his plan...RUN!