While it is possible to perform all of the duties of the general partnership on your own, most apartment syndicators elect to partner up with one or more individuals, either on a deal-by-deal basis or to launch a full-fledged syndication business.
If you want to become an apartment syndicator, one of the first steps after educating yourself on the process is to seek out a potential business partner. The structure of this partnership and even the type of person/people you partner with will vary depending on your current skill set.
In this blog post, we'll go over the process for creating an ideal partnership so you can set yourself up for success from the start.
When making any sort of business decision, the first thing you need to know is what you actually want.
What do you specifically want to get out of your new partnership? The answer to this question will determine the characteristics of the ideal partner.
First, you will likely want to find a partner who can invest a similar amount of time into the business. If you have a full-time job and plan on spending a few hours each night on the business, you’ll likely want to seek out a partner who will do the same. Of course, you may desire a partner who will invest more time into the business than you, but you're likely setting yourself up for failure, as this person may begin to resent the fact that they're spending significantly more time on the business than you. To address this potential resentment from the beginning, the equity ownership of the general partnership should reflect any imbalances in time investments.
Next, you'll want a business partner whose skill sets are complementary to your own. Start by honestly evaluating your own skill sets and desires to determine the role you'll play in the business. The roles that you either don’t have experience in or don’t want to do can be fulfilled by a business partner. For example, do you have a network of high-net-worth individuals but hate underwriting? Then you can focus on raising capital, find a business partner with underwriting expertise, and determine how to split up the remaining roles.
To piggyback off of the previous point, to maximize your business’s efficiency, you'll also want each partner to stay in their own lane. Obviously, all partners in the business should know what the others are doing. However, that doesn’t mean the person responsible for equity raising should be underwriting deals unless that is one of their other responsibilities. Each partner should have a defined role in the business and should focus on fulfilling their duty.
You’ll also want a partner that you can get along with. This doesn’t mean that you and your business partner need to be best friends. But you do need to have complementary personalities. This point is more subjective than the previous characteristics of an ideal partnership, so you're going to need to rely on your own judgment. If you’ve known a potential partner for a while, it's a little easier than if you’ve just met the person. Either way, don’t rush into a formal partnership. Work together for a few months informally (i.e., don’t meet someone at a conference and create an LLC together over lunch) to determine if this is an individual you enjoy working with and if this person is serious about building an apartment syndication business.
Lastly, you'll want to set expectations about how the business will function and flow from the start. This includes setting expectations on the responsibilities, ongoing communication, initial goals, etc. We'll go into more detail about assigning responsibilities in the next section.
In regards to ongoing communication:
In regards to goals:
As I mentioned in the previous section, an ideal partnership is one in which the partners have complementary skill sets. And each partner’s role in the business is based on their skill sets.
In apartment syndications, the roles of the general partnership can be broken into seven categories, and each responsibility has a commonly accepted range of equity ownership.
The person who raises the equity should also be responsible for all ongoing communication with the passive investors. They will notify investors when there is a new opportunity. They will lead the new investment offering conference call. They will be responsible for formalizing investor commitments. They will notify investors once the deal has closed. And they will be responsible for sending ongoing deal updates to the investors. Generally, this investor relations person will receive anywhere between 25% to 40% of the general partnership.
To qualify for commercial financing, someone who meets the lender’s liquidity, net worth, and experience requirements will need to sign on the loan. When you're first starting out, this will likely be a third party, because you and your business partner won’t meet the lender requirements on your own. If this is the case, you'll offer this individual an equity stake (5% to 20%) in the general partnership and/or an upfront fee (0.5% to 5% of the principal balance). Eventually, you and your business partner will be able to guarantee the loan and you can split the equity ownership 50/50.
The person who finds the deals will focus on building relationships with the commercial real estate brokers and implement off-market lead generation strategies. Generally, 5% to 10% of the general partnership is allocated to the deal finder.
This person is responsible for underwriting deals, submitting offers on deals, securing financing, overseeing the post-contract due diligence, and ensuring a successful close. Most likely, the person who finds the deals will also perform due diligence on the deals. If this is the case, this person can be referred to as the acquisition manager. Generally, 10% to 15% of the general partnership is allocated to the person who performs due diligence, and 15% to 25% is allocated in total to the acquisition manager.
This person is responsible for ensuring the successful implementation of the business plan once the deal has been closed on. Among other duties, they will do weekly performance reviews with the property management company and frequently analyze the market to determine the best time to sell. Generally, 20% to 35% of the general partnership is allocated to the asset manager.
There are costs associated with closing an apartment deal. These costs are typically reimbursed at closing, but someone will need to front these costs, which include lender fees and legal fees associated with securing financing and formalizing the syndication partnership between the GPs and the LPs. Generally, 5% of the general partnership is allocated to the person who fronts these costs.
Who will evaluate and select the target investment market? Who will create the business’s brand (the website, company name and logo, business cards, thought leadership platform, etc.)? Who will find and interview team members? Most likely, these responsibilities will be split up between the partners, and will likely be based on who is responsible for the other six duties. For example, the equity raiser will likely be responsible for the thought leadership platform, the deal finder will likely be responsible for finding commercial real estate brokers, the asset manager will be responsible for finding the property management company, etc.
One of the first things you’ll want to do with a new partner is determine who will perform the duties for each of these seven categories and negotiate a fair split of the general partnership equity based on those duties.
The formation of a business partnership is both common and extremely beneficial to launching and growing an apartment syndication business.
To create the ideal partnership, the first thing you want to do is determine what you specifically want out of the partnership. Overall, you want a partnership where:
Once you’ve found a partner or partners who meet this criteria, the next step is to determine who is responsible for what and the equity percentage given to each partner.
Follow these best practices to maximize the long-term success of your new syndication business!
About the Author:
Joe Fairless is the co-founder of Ashcroft Capital, a fully integrated multifamily investment firm with more than $2.7 billion in assets under management, and the founder of Best Ever CRE. His podcast, the Best Real Estate Investing Advice Ever Show, is the world's longest-running daily real estate podcast with more than 500,000 monthly downloads.
Disclaimer:
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.