Structuring Real Estate Partnerships (Roles, Equity, Responsibilities) Pt. 1 | Investor Round Table
In this episode, we'll discuss best practices for structuring real estate partnerships, including the importance of defining roles, negotiating equity splits based on each partner's value, and considering alternatives like debt financing to avoid unnecessary partnerships and keep more upside for yourself. Common pitfalls like failing to properly vet partners are also highlighted.
Matt Anderson, Anderson Legal
Logan Freeman, FTW Investments
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Key Takeaways:
Partnerships can help scale up operations but also introduce complexity and risk
It's important to clearly define roles and responsibilities in a partnership and put them in writing
Equity splits depend on each situation and should be based on a fair assessment of each partner's value
Replacing partnerships with debt when possible can help keep more upside for yourself while mitigating risk
Doing due diligence on potential partners is critical to avoid issues down the line
About Your Host:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.
Episode Transcript:
0:00
This episode of the commercial real estate investor podcast is brought to you by cre launch Pro. This online commercial real estate program is designed to take you from beginner to pro commercial real estate investor with access to all of my courses, our online community, and monthly group coaching calls, learn how to confidently buy your first commercial property today at www dot c r e launch pro.com. Welcome back to the commercial real estate investor podcast live from the well I guess not necessarily gonna cover group studios, because we're all over the place. But coming at you with some technical difficulties on a day where we're going to be talking about some parts of commercial real estate where you can actually have some real technical difficulties. We're talking about partnerships, how to structure these deals, how to negotiate equity, how to split up your roles. And I could see how this could very easily become a part one and part two, because there's so much that that is involved here.
0:58
But I mean, let's be honest, like if you're whether you're just getting started in commercial real estate, or you're doing your 20th deal, partnerships are a great way for you to grow and scale your business. They are also one of the quickest ways for you to lose a whole bunch of money, lose your reputation and get into a lot of legal trouble. So it is very important that you do it correctly. So starting off, Logan, I'm gonna pass it over to you, man. I mean, why are partnerships and commercial real estate so important? Yeah, I mean, I think they're not only beneficial, they're often the bedrock of a substantial portfolio growth. I mean, especially for new investors. I mean, it can be a collaborative approach that can unlock opportunities and scale operations that solo ventures can't, you know, when you're pooling resources, knowledge and networks in partnership, it can kind of create a synergy that amplifies the strengths of each member, you know, which was transforms individual capabilities into collective power. However, however, they're there, we have to remind ourselves that the only thing in life that is constant is change. And I have been a part of I am a part of I have seen very many different outcomes for business partnerships. I mean, there are so many variables, right. And when you're thinking about real estate investing, we try to figure out what are the variables and the especially the variables that, you know, we can control? Well, the one thing that we can't necessarily control, and their decisions are people and so things change in people's lives, their focus, change their goals, change their personal circumstances, change their financial circumstances, change health, they get hit by buses, unfortunately, I mean, all the different things, right. And I say that a little tongue in cheek, but literally, we do have those conversations about, you know, what about the, you know, hit by the bus kind of syndrome and or situation. And, you know, I think that, you know, there's, there's a, there's a way to do this in a capacity. That makes a lot of sense. However, you know, and we'll get into this, and I've spoken a lot about this, this framework that I use when thinking about this, but you know, making sure that you almost have the same type of, of values and, and goals, as the partners that you're bringing in and or doing this is extremely important. But
3:23
I will just say this, the the but being, you know, you don't always need partners, okay. You don't always need partners, and some of the most successful actually three of the most successful investors that I know, have never taken partners. Are they the largest investors? No, are they the biggest scale of portfolio? No, but they are the most successful in that in that regard. So I'll leave it at that. And let the other guys you know, jump in. But I think it's an extremely important topic that we are covering today. And I can speak at length all day about this because I've lived it firsthand. Yeah, when I, when I first got started in real estate, back in 2013, give or take, I was having a conversation with my grandfather.
4:14
And that was one of the first things he told me was never partner with anyone do everything on your own. And I was like,
4:21
you just had a couple of bad partnerships. I'm gonna go figure these partnership thing. You know, this partnership thing out I'm so smart
4:28
man that I have I learned my wife and a couple of times and you know, it's funny like the deal. A minute, let me start off with an anecdote. So last year, we closed out a deal syndication.
4:40
It did unbelievably well, right. It was like 30% Plus IRR for the investors. I ended up walking away with a $400,000 check.
4:51
But it was two and a half years worth of work. I was signed on to the debt. I had to deal with all of these investors, partners. And the only real
5:00
Isn't that we ended up exiting at that prices? Because somebody came along and offered us a dumb number. Yeah, I mean, we were planning on being in this deal for another 10 years, I was gonna have to put a lot more work into it. And so I kind of looked back and I was like, Man for the the amount of stress that I took on having to do everything and carry this partnership, what could I have done in two and a half years to make 400 grand? Oh, I could have built four single family homes by myself, and had zero stress to deal with. I mean, you know, it really put that into perspective of like, oh, yeah, maybe I don't necessarily need partnerships to grow. Maybe I'm not talking, we're not talking about doing 1020 $30 million deals. But I'll make just as much money, if not more, doing smaller deals on my own, and be in a much happier, better place. I think that there is this very toxic side of commercial real estate, where people love to talk about assets under management, or how many units they own. And I think to a certain extent, that's valid, right? Because it helps you at least gauge and understand okay, what level of commercial real estate is this person ended? They have one strip center, or do they have like 1000 multifamily units? Right, you're kind of having different conversations with different people at that point.
6:07
But man, it is not always about the numbers. But Matt, I'm gonna kick it over to you know, what's, what's important to you about partnerships are not important. Yeah, this is such a huge topic, we could go so many different directions with it.
6:21
To me, from my point of view, one of the basic ways I think about partnerships is it's a form of leverage, right, which is one of the things that got me excited about real estate, when I first got into it was leverage. So partnerships can be pretty exciting for that reason, right. But, you know, leverage comes with a pretty substantial amount of risk, too. So that's one of the basic frameworks I think about with partnerships. So for me personally, and my experience and experience of some of my clients is, they've been able to use the leverage of partnerships to get into be deals, they never could have possibly gotten into at that stage in their career, right, or to be able to do deals with none of their own money, for example,
7:02
that they couldn't have afforded to do without the partner, or vice versa, right. Sometimes the partners bring money to the table, and get access to a deal in education, that they'd never have the opportunity to be a part of before. So there's really tremendous, I mean, there's unbelievable upside, almost unlimited upside to partnerships. But there's also extreme risks too. And a lot of that risk comes down to who you're partnering with, right? But it also comes down to, you know, what was referenced earlier, you know, a partnership is a tool, and not every, you know, not everything is nail, right? If partnerships a hammer, not everything's a nail. So there are plenty of times where you can get leverage, or you can get the things you're trying to accomplish with the partnership in other ways, and decrease your risk. And I think, early on, especially
7:50
people don't, you know, maybe the opposite of your grandfather, people think the opposite of partnerships, they think nothing can go wrong, right. And that's how a lot of people start the career out. And they have to find the hard way, that there's very much an ugly side to partnerships. And there's so many ways, you know, there's so many ways that partnerships can go wrong, and only a few ways they can go right to be honest.
8:14
There's not like, there's not that many ways that a partnership goes right. But there's almost an unlimited way, amount of ways that partnerships can go wrong. And so yeah, I mean, there's so many different directions, we can take it because, you know, there are alternatives to partnerships you need to think about, there are some situations you don't want to, you know, be in partnerships in there. People you don't want to partner with and do want to partner with, there are deals you don't want to partner on and do want to partner on, you know, so there's a lot to unpack. And
8:47
at the end of the day, nothing. Nothing overcomes a bad part person as a partner. Right. So that's probably the number one thing I see over and over again, is your work. If you're working with really high quality character people as a partner, then there's a there's a lot of
9:03
mitigation there. If you're working with a partner who's a bad actor, you're probably in trouble almost no matter what you do.
9:11
Yeah, I mean, that's the worst is like having a bad partner that is actually a bad actor. It's like, I mean, it's like having a Russian spy in your government. Right? Like, they know all of the insider information and they can do things to you that nobody else ever could not I've had that happen to me before. I mean, it's like I've had you know, bad partnerships with a partner was actively sabotaging the deal so that they could benefit, which is kind of absolutely wild. I've had bad partnerships where the partners were passively sabotaging the deal. Like, here's here's the here's the thing that I found the only way that I can make it a partnership very successful,
9:51
thus far, right? And to be fair, I mean, I have a partner with every single person that I know in real estate, is if I'm the one that does it.
10:00
That's the only way. That's the only way I've found, like, partners are great because they can help me sign on debt. And they can help me raise some capital. But as soon as the deal the capital raises closed, I might as well just count them up, like write them off as a partner. And I feel like there are people out there that know that there are other partners like that, right? So they take advantage of it, of this, like, well, I know Tyler's not going to let this project fail. So I'm just gonna let him do all the work, I don't really have to do anything, I could just sit here and benefit from it. I see that all the time.
10:32
Let's let's talk about like determining roles. Because when you're getting into a partnership, making sure that you actually have defined roles and responsibilities is unbelievably important. It's one thing that I see most people not even talk about. Or maybe they'll they'll have a high level conversation about it, but nobody puts it into writing, which is mind boggling to me. But when you're getting into a partnership, I mean, we could talk about general partners, limited partners, we could talk about active versus passive. We could talk about, you know, asset manager versus, you know, whatever you want to call it, like investor relations.
11:11
Man, how important is it to have that conversation on the front end? And how should people memorialize that?
11:17
Yeah, it's super important in maybe as a part of the conversation about roles. One of the first things people need to understand is the basic liability principles of a general partnership. Because what a lot of people don't understand when they get into their first general partnerships, is if you're just in a flat general partnership, you've got what we call, typically joint and several liability, you're sharing liability with your partners. So if your partner goes off and commits fraud, or does this or that, you could be on the hook for that. And especially if, for example, you're working with a newer investor, and your high net worth investor, you know, all of all of the recovery could be from your pocket, basically. So you need to understand that. And then there are other ways to do partnerships, like you reference limited, you know, limited partnerships, through entities, you know, all kinds of different ways syndications.
12:07
That could change that. So that's one part of the roles, that's really important. I've been surprised over the years, and how many people I talked to that, for example, think they have limited liability as a partner, and they don't, or don't realize that they're signing off as a personal guarantor, for example. So that's some, you know, some liability side, forgive me for jumping on that first as the lawyer on the call. But then just the general roles to your role and your responsibility.
12:35
But but just the general roles to you know, like, it's super, super important to think through that and to think through it in detail. Like, I remember earlier in my career, working with a lot of younger
12:48
investors, people would sort of think through it, but they wouldn't really think through it deeply. Right. So like, they formed like a construction company together, or a real estate investing company together. And it's sort of like, Hey, I'm gonna find the deal. And I, you know, I've got a construction background, and I'll pull permits, and you know, it's just sort of like, okay, we all got a different like line item we can put beside our names, it's slightly different than the other person. But you really need to go a lot deeper than that. And do you know, like, a value assessment, right? Like, what's the real value being brought by each person? And is there a fair amount of value being spread across the board? And is there real clarity about the specific tasks that one person is doing versus the other? And is that a fair balance, right? Like, is it is it really an equitable arrangement?
13:37
Because if you don't do that, a lot of partnerships go bad when the partners figure out that the deal is not as fair as they thought it was, or when something changes, and it wasn't as fair, that's why a lot of partnerships break up.
13:51
And then, you know, of course, you got to put that in writing, no doubt, right. And, you know, if you're in a partnership agreement, you need a partner, or if you're in a partnership, in your partnership agreement in writing, if you're in an LLC, you need an operating agreement in writing, you know, if you've got the fund or syndication, you might need a lot more documentation than that. You need to put it in writing. And then one way to think about it, I think is helpful is, you know, if, you know, everybody's got an understanding of what their partnership is and what their partnership roles are. But if you read, you know, if a third party, somebody does not in your deal, reads that document, and they can't tell 100% Clearly, what you agreed to. And once your role is done, it's up for grabs, right? It's up for debate, from whoever it is that's looking at your partnership from the outside and and that could be a judge, right? So it's, it's super important. And I think a lot of people step over
14:46
step over dollars to pick up pennies from my perspective, and they don't understand the value of education too, right by investing in these things early on in their career. And you know, if they're lucky they miss out on Khattab.
15:00
For fees, but if they're not, it could really push them back quite a while in their investing career. Yeah, I mean, look, to put it in perspective as to how important it is to put everything in writing, even if you guys decide like, Hey, we're actually not going to meet under the cadence of the operating agreement, let's go ahead and send an email and memorialize that and put it in writing, because another partner could come along and say, Well, I wasn't told that we weren't meeting anymore. And I'm missing out. And I don't feel like I'm informed on what's going on. You guys are hiding. I mean, there's any number of things that can happen. When I was 25 years old, I did a development project, and I didn't have the money to do an operating agreement. So I trusted the developer, instead of spending five or $10,000, on an operating agreement, because he told me, Hey, if you want this memorialized, you go pay for it, which he knew I didn't have the money.
15:51
Instead, I lost out on about four to $500,000. Because when the project was over, he said, Oh, we don't have anything in writing. Thanks for working on it. See you later. I mean, mind boggling, I can't really go too far into detail because we were at a lawsuit. So you know, that's that, obviously, fortunately, to see anything in writing is considered a contract. So I do have in writing from him, all of that stuff. But
16:16
damn, I should have just spent $5,000, it would have made it a lot easier. You know what I mean? So echoing what what Matt said there put it all in writing. Logan, what about you? I mean, what are the primary roles as you see them going into these investment projects?
16:31
25, man, so how long has that been going on?
16:35
Well, okay, so to be fair, statute of limitations is like six years. Okay. So it's a more recent thing. I got it. All right. Understood. You know, what I think we're talking about here is how do we make asymmetrical bets? Meaning, how do I make sure that the upside is unlimited, and the downside is mitigated, and or controlled, and that's really difficult to do. I'll tell you, even having operating agreements in place, you know, you still, if something happens, you still have to take that get counsel, and either arbitrate that, mediate that or take it to court. And so that we're talking 1000s of dollars, we're talking time, we're talking mental trash, and headspace, all of those different things. So the best component to that, and the strategy is obviously to try to avoid that. If you're in business long enough, I think that you will not avoid that. That's just we live in a litigious society. And, you know, we can be sued and or taken to court for anything. So I think that is a part of business. You know, if you're trying to do any business at any level and or scale, however, I think that just like a building needs a strong foundation, I think a real estate partnership requires a strong foundation. And one of the things that I have always been pretty matter of fact about is control provisions and any partners that I am working on. If I'm doing a deal,
18:08
I have to have the control because like Tyler said, I have a hard time, not being able to go affect positive change in any regard and handing that over is very difficult if we are signing on recourse debt, and we are putting a partnership together. Not when I'm passively investing, that's a completely different ballgame, I'm actually giving my control away, so somebody else can go do what they're best at. And that's a completely different conversation to have.
18:39
But I do think that there's a lot of pressure from people that they get put on themselves to get that first deal, you know, and I'll just throw Grant Cardone here, you know, into the mix OGC I've been reading his books for 15 years, you know, to next rule is still probably one of my favorite books and I'm I listened to it every single year. But that guy has investors that are not accredited. Sending him one to $5,000 via text messages. Okay. That's pretty crazy to think about, right? But that's the world that we live in. But I bring I bring him up because I think that this is a, you know, a great example of saying you have to start in 100 unit apartment complex versus a you can start on a duplex on a 5000 square foot commercial building on a house, you can start wherever, why do I say that? That's important? Well, I think that's important because what you will learn through doing your own transaction, figuring it out, first off, I don't have the money, okay, well go figure that out. Figure out how to save your money, figure out how to find money on you know, a home equity line of credit if that makes sense. You know, there's there's different examples, and there's plenty of resources for people to think about creative financing.
20:00
If you're not ready to do that, and you don't have those funds, and you can't get that done, that could be the world or the ethos telling you, hey, it's time to just be patient right now. But there is so much pressure from getting that first deal being involved in 100, plus unit, multifamily property that you finally get to a point where you just relinquish all of your control all of your ability to do anything in a transaction, because somebody on the other side of that Zoom, call that phone call that conference is saying, hey, just join my team. And we'll put a partnership together. And, and we'll do this deal together. Well, if you do that, then a lot of a lot of the benefits of actually, the actual real estate benefits, I call it the ideal investment income, depreciation equity, build up appreciation and leverage. Well, one of the biggest ones, at least for myself, and I know for you, too, sitting here is the depreciation, benefits of real estate and as qualified real estate professionals actually being able to utilize that, well, if you don't sign on debt, if you're not actively involved in a deal, putting money into a deal, guess what, yeah, you may be able to say, I'm involved in this syndication, but you have no basis in that real estate transaction. If you don't know what that means, go read some real estate books and or structure, but simply put is, you don't have any depreciation opportunities really in that in that real estate. And so there's just a lot of pressure, I think, for people to get going and making that first jump into a large real estate transaction, which then actually, you know, impedes their ability to actually get to the goal that they were trying to get to, by doing a bigger deal. And so I think that these things need to be thought through much more thorough, like Matt was saying and understood from that level, because instead of doing that 100 unit deal, maybe taking a couple of years, putting some cash away and buying a really good four Plex with a conventional loan, that might be the great a great opportunity and a great area. And then three years later 1031 exchanging that. And by the time, you're sitting here, five to 10 years later, you might have 25 or 50 units yourself that you can then sell. And if you want to get out of the business, go invest into a syndication or trade that up with larger syndication yourself, I got off a phone call yesterday with a guy he's like, I did 700 transactions before I ever raised any money privately, and I treat every single deal. Like it's my own money because I've done it that way. And I think there's a lot of merit to that. However, what we hear and what we see on a lot of shows and mentorship groups and things like that is not that that that part, but you know, I'll just I'm not going to name anybody but these mentorship groups, they are funnels, okay, they all go to Russell Bronson's conference, they all are master click funnel, and they are in the, the $10 million club or the the gold club, whatever it is, they're gonna post it on their social media, and you're gonna say, what is that? And now that you did now, you're going to be retargeted by Russell Brunson for 25 years, because now that they've got it.
23:03
They've got affiliate links set up for if you click that, then yeah, you get 25 cents on every single click, if you you know, promote this to your network. Long story short, he's mentorship groups are funnels for these individuals who have resources to get deal flow brought to them, and to create businesses that when they're not doing real estate, they continue to be able to cash flow on on the merits of people who are truly trying to get into the industry, if you really want to learn it. How about going to taking some some real estate courses at your local college? Or how about checking out CCI M and really understanding financial modeling and how these deals get put together? I think there's a different route. And I think if somebody takes that route, they're going to look at partnerships very differently that Matt, you could probably speak to this but the Jobs Act of 2020 12 was really what allowed or maybe it's 2010 but it was the Obama administration is what really allowed for digital marketing and social media to really break this open into this whole new, you know, product service based you know, industry. And a lot of big people with big followings were able to monetize that. And that's what this is, and a lot of ways is monetizing. You finding a deal. Bring it to them them taking the lion's share of it. You saying? Yep, I'm in a deal that has 250 units? And is that really, truly getting you closer to your goal? I don't know. And I do know that many of those opportunities and deals are not, you know, doing all that great because they were monetized to get deals done. So I think that's extremely important to be thinking about. Yeah, I want to tack on just real quick to that. You know, I was having a conversation with somebody not that long ago. And they were thinking about getting getting into a partnership and we got into a pretty deep discussion about it. And I said, Look, man, you can't delegate overcoming your fears, right? You can't delegate getting minimum competence in the area you're trying to go into. Right and I think that's what a lot of you know, the sort
25:00
What you're speaking about, I think a lot of people use partnerships as if it's a shortcut. And it's not a shortcut. In fact, it's like we said it's leverage, right. So if you're playing with leverage, you actually need more sophistication, you really need to know what you're doing if you're playing with leverage. So I think that's the big mistake people make is they, you know, they don't want to overcome some fears. They don't want to make the call, they don't want to make the offer, or they don't want to have the hard conversation with the contractor, whatever it is they're afraid of doing. And maybe they don't want to read the book. They don't want to get the legitimate education. They don't want to get the minimum competence. And that's not everybody, but it's just a mistake that I see a lot. And I think that's a really bad idea as far as a way to use partnerships.
25:42
Yeah, I mean, you know, kind of going back to what you were saying earlier, Logan, with the you know, starting off at 100 units, like that's such a crazy reach goal. But it's it's been so normalized by real estate syndicators. And the way that they talk about things, I mean, let's be honest, going from doing zero real estate to buying a 100 unit apartment complex. I mean, that's like, that's like graduating from seventh grade and applying to Harvard and thinking that you're gonna get in, right, like, is there one weird kid that's going to be able to do that? Sure. But the overwhelming majority of people are not going to be able to accomplish that's just not how it works. I mean, my first project $575,000, it was a little 6000 square foot two tenant building, totally vacant, like 20 minutes outside of Nashville, it uh, you know, not so great area. And it was a great deal. You know, why? Because I had to call two guys. And they both said, yeah, we'll give you $50,000 Each, I rolled my commission, and we held it for two years, I sold it to one of the tenants I ended up leasing it to is an awesome deal. I'm not, I didn't retire off that one thing. But I also I proved to myself one, Damn, it's a lot easier to do this than I thought it was. Right, because you like build it up so much in your head. I mean, this was five years into my brokerage career, I had done millions and millions of dollars of transactions for other people, I had been through that process so many times. But there's something about stepping on the other side, where you're like, oh, man, I can't sleep. Like there's, I gotta get this through my head. This is, this is crazy.
27:11
But I mean, start small, just do one and snowballed. From there, it's a lot easier when you just start thinking of it that way, there are plenty of 500,000 to a million dollar properties out there that if you're willing to put the work in, can make for great investments. Now, moving us into talking about equity splits,
27:30
I'm going to throw out a question to you guys that I get asked all the time. And, you know, I'm sure you guys get it too, right. It's, Hey, Tyler, I found a really good deal. And I'm talking to this guy that I think is going to put up all of the money. How much of the equity should I get in the project? Or how much of the equity Should I give them?
27:54
How do you answer that? I wouldn't know. Because I've been I've got a whole story about how you know, my thoughts on that a bad man, I'm going to turn it over to you first. What's your response? Well, I'll tell you, my response is the classic lawyer response. It's it depends every time because that's just it's such an impossible question. You know, like, it's such an impossible question like, Okay, let me spend the time to understand your your deal in great detail. Let me spend the time to understand your partner in great detail. Let me understand your skill set and your values in great detail. I can't do that. Right? When when I mean, I've got a partnership, for example, I've got a partnership, two partnerships with the same people in it. Right. And in one partnership, my role is the exact same in both of them. In fact, the second one, I'm probably more valuable because I gained some skills along the way. In the first partnership, I own 20% in the ER, excuse me in the first one I own 25% in the second one out and 20%. Well, what happened? Well, the roles adjusted slightly because of the kind of asset it was the equity on the deal, you know, what we thought the equity was on the front end was a little bit different, we got a little bit of a seller carry difference. So there's so many pieces to the equation. At the end of the day. Equity splits are subjective, and they're supposed to be based on the partners best assessment of Fair, fair value. Right? At least that's that's my point of view.
29:19
So how can I you know, how can I possibly tell you what your value is? I don't know. So that but that's baked into the equation, in my opinion of what the fair equity split should be. So yeah, I don't really answer that question, frankly. I mean, I see the guys with like, the charts where you'll take the chart, and you know, somebody gets X percentage of the deal for operating and somebody gets X percentage for, you know, managing this part and all that, which I don't you know, I don't think it's unhelpful. I just don't think that it's really the way you know, it's not going to get you to an exact number. It's not a science, right. So it just takes time to figure out where the value is and where your value is.
30:00
As in, you know, if you if you're a deal finder, one deal that you find might be a triple in one deal might be a home run, and you better get more equity on the homerun than the triple, or, or you're selling yourself short. So, yeah, I mean, it's every deal is different, right? And that's important to keep in mind. There's no set formula that you can just take it every single deal and think, Okay, we've got this, this is how we split it up. It's gonna be the same every time. It's totally different. Wogan. What about you, man? Yeah, I mean, I tried to utilize the tool that Matt mentioned, right, which is a split worksheet. Now, this is not the same for every single opportunity. But I'm also not partnering with a whole lot of people. And I have really one defined group that we really work with, that we've done over seven projects with now. And so we've we've refined this to a point where we feel comfortable, but maybe what I'll do is just walk through the different components that are on this worksheet, so people kind of can understand what that might look like. And so, you know, I'm always thinking about the pre close work, right? Who's doing the due diligence, who's sourced the opportunity, who's doing the underwriting, that's a big component to these real estate deals, we don't have a deal unless somebody brought a transaction to our table, I've had partners just went full cycle on a deal, the only thing that he did the whole time, was bring the opportunity to us. And we stepped in 100%. And he made out pretty dang good at the end of the deal, because we wouldn't have had one if he hadn't brought it to us. Right? Then you have risk capital, right? So this is escrow. This is deposits, you know, do you have to put money up for inspections, and appraisals and financing and things like that. So this is money that could truly be lost, you know, in the transaction, if it doesn't get consummated. And then a big one is the loan and balance sheet and liquidity experience. Because, you know, if these, a lot of deals that we do are recourse loans. And so, you know, I'm not sure a lot of people actually understand what that means. And how important that is. Because, you know, I guess I could probably just ask anybody on the call, when's the last time you reviewed your, your loan documents and the different covenants? That's a pretty serious thing to be thinking about, especially at scale. You know, who's calculating? Or have you calculated how much recourse you actually have? out there? Yeah, you got your fancy, you know, personal financial sheet. But, you know, what it really doesn't show is that you've got seven different loans that are at 85%, LTV that aren't really cash flowing, and you have full recourse on all of those, that partner may look good, up until the point, you know, what type of loans that they have, actually, you know, signed on and if they do go south, they have to, you know, come up with the money into or provide the gash, you know, for that.
33:06
Asset Management, right. So investor relations, this is site visits, this is doing the actual operations. And then there's obviously bringing capital to the projects. What I will say about this, and man, I don't know, if you're a securities attorney at all, I am not. And I will preface that with what I'm about to say I'm not a yachties attorney. But I frankly think that there's probably a lot of, of deals being done and compensation being shared among partners that are acting as broker dealers in a lot of scenarios that truly aren't, you know, active participants in those in those deals. And that is a, that is not just a light gray area, that is a dark gray area that only really gets brought up is when something's going wrong, right. And, and so yeah, if you've got the Midas touch, and everything's turning gold, maybe you're okay. But most of us do not. And so, I again, that's the categories, but look, it's a tool to get a conversation, I think, going in the in the partnership realm, because, you know, there's going to be concessions on both parties, and you have to be able to come to some sort of agreement. And without having a will to be able to talk through it. You're just kind of, you know, everybody's just kind of, you know, throwing out numbers for for what sake and, and, but if there's actually something to work through that has some calculations, it's a good starting point, to kind of discuss, you know, I remember doing my first deal, you know, that I, I found and, you know, I still own this this deal. It was a mixed use building. So had a bagel shop on the main level, and it's Airbnbs, up top and a hotspot in Kansas City. And I remember finishing, Joe Fairless, his apartment syndication book, so this was probably six, six years ago, five, six years ago, and reading straight out of this book to this investor that I was pitching the deal to and say
35:00
Ain't Well, you know, I know that you're not here, local and Airbnbs, you know, have a little bit more operational component to them. What if I was just boots on the ground here doing the asset management, working with the property management company renewing leases with the bagel shop? By the way, I've never done a commercial deal. And so I was like, Well, I guess I'll have to figure out commercial leases at that time.
35:21
And for that, I'll take 25% of the deal. I'll put an acquisition fee on here, I brokered the deal as well, you'll sign on the loan, I did not sign on the loan,
35:32
and put all the equity up into the deal. Would that be fair, and we didn't land on 25%? I think we landed on, you know, 17 or 18%. But like, I found the deal. I didn't have any risk in regards to that deal. And I felt that was pretty well compensated for that when we go to sell, am I going to see any cash flow on that thing? No. I mean, he gets 100% of the cash flow like he should, right. And so I think that day, and we papered that thing up in a joint venture agreement, and that deals worked out really great for us. And so that's a really simplified version. But at least I had two tools, I had this GP split worksheet, and I had a at least idea of what that might look like with an investor introduced the idea. And we came around to terms that we both felt good about, and we move forward. And it's been a successful transaction. So I think having some sort of starting point and basis is extremely advantageous to these conversations that you're having with, with potential partners. Yeah, just like anything else, right? Ask the question, why get to the bottom of what is important to each individual person. Because I've had investors give me cash that don't want any cash flow whatsoever. They want their equity, but they want 100% of the depreciation. Well, that might actually work out pretty damn well, for me, if I'm looking at this going, you know, what, I just want a cash flow play out of this, I can get my depreciation from another property. Let's go. Right. And so I mean, there's, there's so many different ways to structure it, if you just ask why. What is important to them, what matters to you, and and figure those things out. I mean, there's, gosh, there's so many different ways to structure these deals. I mean, you know, typically, whenever we're looking at our general partnerships, it's like, Oh, 25%, to whoever brings the deal to the table 25% for, you know, raising the capital 25. But you know, what I mean, you can make things up, at the end of the day, that's kind of all it is, it's whatever you and your partners are going to agree to.
37:24
I hear way too often on the first deal, like, I don't have any money, I found a great deal. And I know it's a great deal, because I've never done real estate before. So it's definitely a really good deal.
37:36
I want 50% of this deal.
37:39
And I want my investor to put up 100% of the cash and I want them to sign on the loan. I'm like, Look, the first development project that I ever did, I had zero experience in development, other than I mean, I had some experience, but it wasn't like I had ever done a project before.
37:54
I didn't have any cash. And I definitely it wouldn't have mattered if I signed on the loan, like it wouldn't have done, it probably would have heard the case.
38:02
And I got 10% of the deal. But I mean, I would do that deal today 10% of this development project with no not having to put any money in not having to sign the note. All I had to do is do the sweat equity and actually run the project, pull everything together. Absolutely. I would do that all day. So don't think that 10% is too low. One thing that I think people often forget to talk about, or at least consider is your risk adjusted returns. Yeah, 50% of a project sounds great. Until you start to realize, Oh, if this project goes wrong, and I have to put up my 50% of the cash for construction overruns, or my 50% of the cash to cover the mortgage, you start to realize like, oh, yeah, maybe 50% Actually, isn't that great. And I would rather have partners that can help me do this. So
38:54
one thing I wanted to throw out there real quick, because I know this is is a question I get asked all the time about my own vendors. And again, I know you guys do too. What are your thoughts on vendors, like general contractors, architects,
39:08
throwing in their, you know, overhead and profit and becoming a partner with you? So like, oh, I will mark up anything. Just bring me in as a partner into your deal? Logan, I'm gonna start with you.
39:19
Yeah, you know, I've never done it. I've been offered that opportunity quite a few times.
39:27
But, you know, I think introducing more complexity into that situation can be somewhat difficult. And again, if you aren't in a position to,
39:40
you know, really pay for those services, you know, you're kind of putting yourself in a position where you're just accepting that to get something, you know, done and how are you going to be able to really evaluate, you know, all of the different components is this person, someone that I want to actually have in my deal?
40:00
versus somebody I need to have in there because I need the work done. And so I would hate for that to be the first time that you get a relationship going with a vendor. If this is someone we're talking about that you've known for 1520 years, and you know, their business acumen. And if they're not a bad actor, and you've been around them, then I think it's a different conversation, potentially, and or you could be doing them a favor by getting into one of these real estate deals, because maybe they don't have the cash to be able to actually get into a deal, but they're looking for that, that that might be able to, to work. But, you know, I've not been a part of that. I know, there's a lot of real estate brokers that sometimes will end up rolling their commission into getting a deal done and getting equity that way as well. I think it's just like Matt always says, It depends. And I think it can work. But my blanket answer would be, you know, I've shied away from that and made sure that I didn't introduce even more, you know, people into a transaction. Now, if you're doing a syndication, and you're raising private money, and you're going to have passive investors regardless to that, that could work. Right. You know, I mean, I think that that could maybe be an opportunity where you take the fees from what that was going to cost and roll that into an equity situation. And their limited partner, then yeah, I think that might be an easier way to potentially do that. For sure.
41:24
Matt?
41:25
Yeah. From so I mean, one of the things one of the frameworks I work off of with partnerships is, is something really unnecessary, like unnecessary partnership role? Or could it be in a, you know, an independent contractor role or a third party role? Right. So I think that's a mistake a lot of people make is they take something that could easily be hired out, or just independent, contracted. And a contractor can be a great example of this.
41:53
And it's really not necessary to make that person a partner. And so I'd go back to your question of why, right, like, why are they being made a partner? Well, a lot of times people make someone like that a partner to align incentives, which that's a good idea to align incentives. But there are alternatives to partnership. So one thing you're doing when you're adding a partner typically is, like Logan said, not only are you increasing the complexity, but you're increasing the risk, right? You're increasing shared liability. Right? So and then. So what that means really is every time you add a general partner, your risk adjusted, return is going down, is another way to think about it. Right? So, you know, from my perspective, it's usually not a good idea to do something like that, if you can avoid it. Yeah, there's all kinds of alternatives. You can, you know, I've got clients who will pay their contractors, bonuses based on profit, right? pay their contractors, bonuses based on meeting or exceeding timelines on the project, which is usually what you're really worried about, right? Or costs, give them bonuses, if the costs are lower, or you know, if they meet the costs. So there's a lot of other ways to meet that. I'm not saying it's a bad idea all the time, I just think that people don't really think through the implications, a lot of times, and you should be very thoughtful, when you're going to add a partner, someone who has the ability to exercise control over your project, someone who has the ability to add shared liability to you.
43:21
I think it's something to avoid when possible. And, and honestly, it's one of those things where if you can do a deal without a partner, or do a deal, without adding an additional partner, you should, you should think through how that would be possible, because usually, you're gonna be able to keep a higher return for yourself if you don't need that person as a partner. Yeah, I mean, I've typically avoided it for a couple of reasons. I mean, one, going back to what Logan was saying earlier in the show, you know, getting hit by a bus syndrome, if I hire a general contractor, who you know, knocks 10% off of their price, because they're going to be a partner in the deal. And then they get hit by a bus and I'm gonna go hire another contractor at market rate, which is now going to be 10% higher than what I've budgeted in my pro forma, we're gonna have some problems. So not only am I now having to pay more for construction, the the heirs of my guy that just got hit by a bus still get to profit from this deal. Right. So it doesn't make any sense.
44:23
I think that as long as they're signing on debt, they're taking equal amounts of roles and responsibilities under the general partnership as as any other partner would, why not? But you got to be very careful with it. The only reason that I would ever consider anybody like that is if I still have full override voting abilities. I will fire your ass off for this job if you don't do it, right.
44:47
Because it happens all the time. I mean, I've had I've done it one time where I've had a vendor involved in one of my projects. You would think that he would have cared about cost overruns since he had to put up you know, two
45:00
Well over 15% of the capital needed for anytime we had a capital call, didn't care. I mean, he just kept running up the bill on the construction side of things. And we kept having to put money back into it, and we were trapped.
45:12
So it's just something that you want to be careful of doster group is saying 10% is terrific, completely agree. I mean, look, I would take 10% RISK FREE in any project all the time. Britton Miller is asking you a pretty interesting question. Thoughts on partners bringing cash versus debt? So have you ever gone out and had your partners bring, like, instead of selling any equity, you're just bringing, you know, kind of like mez debt Ed, right. To fund a project. I mean, I've actually looked at doing this a couple of times, right, go out and raise 100% debt from my investors at, you know, 10% interest, but the interest accrues. And until the project is done, or until I refinanced about. I mean, there's some obvious pros and cons to this, I think that there are some great potential upsides if you think the equity is going to be worth it, but terrible potential downsides, if you don't think it's going to start covering the debt. Logan, I'm gonna lob it over to you, what are your thoughts on that structure? You know, I mean, the only time I have done this, and this might be a little bit of a different scenario, but anybody tried to raise capital during Christmas time. Good luck. It's really difficult. And so if your closing is in December, your capital better be raised probably before Thanksgiving. So it can be a really difficult situation. So we got to get down to the wire on a large industrial building, and I was about $500,000. Short, I put up some of the money, but then I called one of my buddies, that was like, Hey, man, I'm kind of in a pickle here, I need to get this done. And he was willing to bring in debt to close the transaction. And we continued to raise in January. And then two weeks later, we, we had the equity raised out so for, you know, really 21 days, you know, he had about $500,000 into the deal that we had to pay interest on and a fee to get that deal completed. And it was well worth it, you know, locking in debt at the time that we did it 5%. And getting everything done was was well worth it. It's been a great opportunity.
47:21
So I've used it in that way, on transactions very sparingly. So only time I really needed to do that. But in regards to raising 100% of debt and doing that. Yeah, we close the transaction last December. And, you know, again, is in December banks basically shut down in December as well. And, you know, frankly, I wasn't a very good lending time, maybe still not but really bad in December of last year, if anybody remembers, it wasn't much fun. So we raised 100%. Well, we had we had equity, but then we went out and raised the rest of the capital needed and put it on as debt and we still haven't refinanced that, like we're going to start refinancing process here. Soon. What that allowed me to do was, I was able to come in, close on the transaction and save Well, this depends on if in Congress, it gets passed, but at the time, you know, the bonus depreciation was i What was it last year, guys? 80% 80 80%. Or it was 100%. Last year and 80%. This year, I always forget. Oh, yeah. I don't know.
48:29
I've been talking about it for so long. Yeah, it wasn't 100% last year, and it's 80%. Now, yeah, okay, so was able to save that 100% bonus depreciation. And that was a big, you know, emphasis of doing that we could have just, you know, continued to go on a project and close in January, but raise that in debt, and close on the transaction. What that allowed me to do was capture that bonus depreciation benefit, but also, I was able to get in there and negotiate with these leases. And so now I've extended three or four leases in the shopping center. And I'm going to be able to go to and I have enough capital to do some capex, you know, did the parking lot already. And so I'm going to be able to go to the lender and say, Well, you know, we've leased up some space, we've renewed some major leases in the shopping center, we've done some capex improvements and now that project is much more financial from a bank standpoint than it was when we bought it so some somewhat of a bridge loan just from our own, you know, investors and got it done in that way, but it's not a full sound of long term you know, capital capital plan for us just simply a, you know, a short term situation to get a good a good loan on it here later this year.
49:42
Yeah, I recently looked at a mobile home park down in Mississippi, I think, where we were actually entertaining it. Although it's not necessarily like right in my wheelhouse. I was like, yes, seems like a pretty good cash flowing opportunity. And it was only like 450 grand or five
50:00
Got a grand, so I just sent an email out to my investor West, I was like, hey, I'll give you guys 10% interest, you know, debt position, first position on the property,
50:09
you know, personally guaranteed if anybody wants it. And man, I mean, I raised like one and a half million dollars in eight hours ended up not going through with that project,
50:20
basically, because the mobile home parks are really really hit or miss and most of them are miss.
50:27
So I decided it was not up to our standards. But it did show me that a lot of our investors are actually interested in that type of structure, which I hadn't tested out before. And I like that for a couple of reasons. I mean, one, if I don't have to have any other partners, any other seats at the table, Tam, does that make my life so much easier? I prefer that. I mean, there, look, I've got some great friends, that would be great partners. But at the same time, it's just so much easier when you're the only one that has to make the decision. First of all, I'm terrible at communicating, that cuts out having to send emails to people or text messages or phone calls, like I get to just, you know, tuck up inside of my head. And it's done. Right.
51:07
But also, you get to keep 100% of the upside. So, Matt, what are your thoughts though? No, I mean, I love it. I mean, the other thing I do, I mean, I say I love it, I love replacing partnerships with debt, right? So, especially for really good deals, if I find it an amazing deal, like a really good deal. My objective is to find a way to keep all of it. Because if I really believe in it that much. So a lot of times I'll do that via seller financing, right, we bought two buildings that probably would have normally been thought of from partnership, raising capital perspective by most investors. But we kept it all ourselves by leveraging it with increased seller financing. So what that allowed me to do is to take the project and keep all of it when under, you know, this model, I would have probably had to give 25 to 50% of the way based on the numbers. So, you know, but that's a double edged sword, right? Because you're taking on all the risk for yourself. And but with a great deal. It can be awesome to replace partnership with, with debt, in my opinion.
52:16
Yeah, I completely agree. Well, it looks like
52:21
I mean, we're gonna have to make this a part one and part two, because I'm looking at our next couple of talking points and like there's not a chance we're going to cover these in seven minutes. So yeah, doster is like Tyler talks inside his head. Yes. Yeah, I do. I'd much prefer talking inside my head than talking outside of my head, which is hilarious because I have this podcast, but I much prefer silence.
52:42
Yeah, so let's, let's pick this up. In the next episode, we'll make it a part two, we'll dive into aligning your goals doing your due diligence on partners and common pitfalls. I mean that that episode might actually be more important than this one. Because doing your due diligence on partners had to have my cover a conversation with somebody about this today. They came to me and they're like, hey, you know, something weird is going on. This guy said that his bank accounts frozen, but he was supposed to wire $5.6 million today. And I was like, who froze his bank like, oh, the bank dead. I was like, that doesn't happen. Banks don't just freeze bank accounts. Like it's either the FBI, the IRS or something bigger. Turns out that dude's a scammer happens all the time in this business. You have to do your due diligence. We'll dive into that in part two. Appreciate you all for joining us. Logan, Matt. We'll see you guys later. Thanks, guys. This episode of the commercial real estate investor podcast is brought to you by cre launch Pro. This online commercial real estate program is designed to take you from beginner to pro commercial real estate investor with access to all of my courses, our online community and monthly group coaching calls. Learn how to confidently buy your first commercial property today at www dot c r e launch pro.com
This episode of Office Hours covers strategies for commercial real estate investing, brokerage, and career growth as Tyler Cauble takes live questions. He also discusses upcoming projects like a brokerage mastermind and hiring an investor relations lead.