Posted 5 months ago

The Overlooked Component in 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 which sometimes require full time attention. The most recognizable players, who form the General Partnership of a syndication, are the deal finder, the loan guarantor(s), the person who finds the investors, and the asset manager. Often people perform multiple roles, however, the larger and more complicated the syndication is the harder it is to execute more than one role. One example of a more complicated syndication is when there is a value add component.

One of the most common value add syndications is when the General Partners (GP) reposition a property by way of doing renovations to an existing property with the sole goal of increasing rents. A very 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 managing 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.

For starters, if you hire a Construction Manager, you and your ownership interests are not aligned. Unlike a Property Management company, who’s compensation is correlated to the success of a property, as measured through monthly rental income, an outsourced Construction Manager actually gets paid more when a project performs poorly (for example: 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 that one Construction Manager who is willing to not be paid more if a project goes over budget, he/she has 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 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.

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 cost, 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 a 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.