What You Could Be Overlooking in Apartment Syndication
Everyone says apartment syndication is a team sport; you are not going to be successful without partners. They are absolutely correct. Apartment syndication has multiple moving parts that sometimes requires full-time attention. The most recognizable players, who form the general partnership (GP) of a syndication, are the deal finder, the loan guarantor(s), the person who finds the investors, and the asset manager.
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Oftentimes people perform multiple roles. But the larger and more complicated the syndication is, the harder it can be to execute more than one role. One example of a more complicated syndication is when there is a value-add component.
How to Scale Renovations
One of the most common value-add syndications is when the general partners do renovations to an existing property with the sole goal of increasing rents. A careful analysis is performed to understand the correct formula of how much renovation is needed to yield the greatest return, given the specific market’s constraints.
Due to this one-size-does-not-fit-all approach, the scope of the renovation can vary. Regardless of the scope, oversight of the renovation is paramount not only to the execution of the renovation, but also the overall success of the project. This begs the question: Who should manage this component?
For smaller sized renovations, it can easily be absorbed by the asset manager. However, for larger sized renovations, there should always be a member of the GP with applicable construction management experience monitoring this component.
For seasoned GPs this may be a deviation from what you are currently doing, as most teams outsource this responsibility to a construction manager of the property management company, or another third party. But stay with me a bit longer to find out the reasons why you should not be outsourcing this responsibility.
Why You Shouldn’t Outsource
For starters, if you hire a construction manager, you and your ownership interests are not aligned. Unlike a property management company—whose compensation is correlated to the success of a property through monthly rental income—an outsourced construction manager actually gets paid more when a project performs poorly. (An example would be going over budget.) This is due to the fact that construction management compensation is based on a percentage of the project total. If the total increases, the management fee does too.
Even if you find one construction manager who is willing to not be paid more if a project goes over budget, they have no incentive to be under budget. Another example is an outsourced construction manager does not understand how time affects apartment ownership.
In other words, do you think an outsourced construction manager understands how delaying your renovation can significantly affect your net operating income (NOI), and thus, your overall property evaluation? Furthermore, if the plan was to sell the property in five years or less, project delays could set back your exit strategy.
Include a Construction Manager on Your Team
Having a construction manager as part of the GP ultimately provides another layer of protection on an apartment syndication. The construction manager is motivated intrinsically by the same factors of all partners. They can also provide alternative renovation suggestions resulting in cos and time savings. And because construction managers are on the GP, they also understand the business behind owning and operating an apartment.
As there are already a lot of roles that comprise the GP, adding a construction manager can seem like an unnecessary addition. One way to simplify the roles is to look for an asset manager with construction management background. Either way, recognizing the importance of having this experience on your team will not only add a layer of protection to your investment, but also the cost and time savings will be reflected in your overall returns.
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