Partnering With Property Manager

[Snehann Kapnadak]

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!

[Brian Burke]

I just can't think of a good reason to do this.  A property management company is a vendor and I wouldn't give equity in exchange for vendor services.  I can see a situation where you and a person very experienced in property management team up and form a company to acquire assets and each of you get some sort of split of the revenue (and expenses) of that company.  Those types of partnerships happen all the time.  Just choose your partners well and don't move too quickly until you are certain you have a perfect match.

And I could see where a long-time management company relationship could one day grow to where the management company is making a financial investment in your acquisitions (alongside your other investors).  

But to propose to a management company, who you don't know and they don't know you, that they make a financial investment in your first deal and get an equity stake just seem beneficial to either side.  But there are some people out there doing it...

I'll play devil's advocate on your win-win points.

For the PM: 

• "They get a large chunk of equity."  Yes, a win for them if the deal goes well, a loss for them if the deal crashes and burns even if no fault of their own.  So, a big risk and one that a lot of "fee-for-service" business owners are trying to avoid.  They know that if gold mining is risky, selling shovels is safe.
• "They get more business."  True.
• "They get access to my investor's capital."  Let's hope not.  That would be destructive for you (what would they need you for then?).
• "They eat what they kill."  True.  But if you sit down at a restaurant the food you are served could be poisoned by a careless chef.  The chef in this kitchen is the economy and real estate markets.  Such was the case in 2008 when the financial world around us collapsed.  If that happens, they get killed.  For many property managers, this is why they are in the business they are in--the management company is low risk and will make it's fees no matter what.  They aren't taking the risk of loss the way owners are, and may not want to.  Sure, there are some that might, but if they have the money and the knowledge, they don't need a "partner" doing his first deal--they will just do it themselves (and many do).

For you:

• "I'll look favorable to the lender."  Yes, but same is true if you have a management company under a management agreement.  They don't have to be a partner nor have equity for a lender to sign-off on management.
• "I'll get a deal under my belt."  True.
• "I'll be able to get help with the down payment, reducing the burden on my investors and myself."  If you have investors, they are helping you with the down payment so you don't need the management company's help.  If you don't have enough investors, either get more investors or look for properties in a lower price range.  Shop within your credit limit, so to speak.

For your investors:

• "They'll get a higher return due to the lower management fee."  No way.  Equity is far more value than fees and management fees are a de minimis cost of doing business.
• "They'll sleep easy knowing that the PM has skin in the game and is experienced."  Or, they will be awake at night knowing that if the management company screws up they can't be fired because they are an equity owner, and if they are fired they'll have to pay the replacement manager higher fees while still giving up the equity to the first management company.

I think the biggest downside for you is that you don't know if the management company is any good.  Yes, you can screen them, get referrals, etc, but until you actually work with them and see them in action it is a big risk.  So my $0.02 is hire your management company, have an ironclad contract with a 30-day termination provision, and get your partners and investors elsewhere.