Need some guidance!

7 Replies

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!
Originally posted by @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!

 Why is he unhappy with his current partner? I do Joint Ventures with partners but haven't had the experience of wanting to dump a partner. That can get really messy, too. Better find out more details to your satisfaction before you spend too much time on it.

Craig,

I agree with @Mike S. find out why he does not want the current partner, it may be that the current partner is not doing his part but you don't know. If you are putting skin in the game and managing the property then you should get a management fee on top of a percentage for the money you have in it. so if your buy in is 50% of the value of the properties then you should get 50% of the NET income ( so your management fees would be deducted from the Gross income) but then you get paid the management fee.

I agree with @Mike S. and @Patrick Liska , 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!

@Mike S. @Patrick Liska @Scott Skinger

Thanks for the replies!

Let’s say hypothetically, you’re in my position. Most of my liquid cash is invested in my third apartment deal that I’ve got under contract, so I’m light on cash right now.

*Assuming after due diligence and everything checks out*

Maybe we can come up with something that looks like a reduced monthly management fee (half of what I normally charged) and a small equity stake (10% or so) and I like the idea of a quarterly distribution. There isn’t currently any income coming out of the building, so it’s on me to fill it, keep it full, etc. I do think there could be some good upside potential once the building is full and then on the back end for a sale. It sounds like the owner and his current partner don’t share the same vision, as the current owner wants to finish off apartments, and rent them, while the partner wants to run his business out of the building.

How could this be set up? What would you recommend?

Craig,

 From what it sounds like, your part will be to fix the remaining apartments up and manage the buildings but not have any money in the deal ? I would not have a discount for managing them then, what if you can not rent them, your time is money. i would charge the full management amount ( you only make money if you rent the place out ) and then work out a percentage for getting the properties up and going and maintaining them. see if you can work in that same percentage if the properties are sold

You can come up with a lot of different ways to structure the deal but as I said before, at the end of the day it really comes back to how much money it takes to make this deal worth it for you and how much risk you're willing to take. If you just charge a flat management fee of 10% per month, this is a less risky. As soon as you start getting into equity, there are a lot more moving parts that will impact how much money you make and unfortunately you won't have direct control over many of them (timing of sale, sale price, market cycle, etc.). Just reading "partner problems", "not currently any income coming out of the building", "finish off apartments" from your posts makes this deal sound risky. 

Instead of equity play, consider the following ideas, which are a lot less risky to you and can potentially yield the same or more money to you:

1. Just be the property manager for a straight fee for 6 months to 1 year. Charge your fee and re-evaluate at that time. You will know a lot more about the owner, the building and what makes sense for you at that time. You also might have some more leverage in your negotiations if you have done a good job and he relies on you.

2. Many property managers charge a lease up fee as well. Come up with a deal that is something like 5% for property management + 1 month's rent for any new leases that you sign on, 1/2 month's rent for renewals. Show the owner how you are saving him $ by reducing his vacancies and the fee he pays you is less than the vacancies are costing him.

These are just some quick ideas but be creative and come up with something that puts $ into your pocket today. If you end up still wanting to go the equity route, you need to better understand his plan and see his projection model (spreadsheet). You need to understand it and believe in it, otherwise you are just investing your time for a lottery ticket...and your numbers probably won't hit.

@Scott Skinger You’re right. I think the best play is to just manage the building for now and re-evaluate in a year. I appreciate your insight. Thank you!

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