A frequently asked question I receive is “how do I partner with a property management company on my first deal?”
The challenge first-time apartment syndicators face when pursuing a deal is a lack of credibility. They’ve never done a deal before, so being taken seriously isn’t a guarantee. However, by partnering with a property management company, the first-time investor can leverage the management company’s experience in order to establish credibility with the seller, the lender, and the investors.
Based on my syndication experience, there are four distinct ways a first-time syndicator can partner with an established property management company
Method #1 – Sign the Loan
The first way to partner with a property management company is to have them sign on the loan. As a result, they will become a general partner in the deal.
This is ideal if the syndicator doesn’t personally have the liquidity or net worth to qualify with a commercial lender. By having the property management company’s signature, the syndicator can leverage their liquidity to be approved for a loan.
To compensate the property management company, the syndicator can offer 0.25% of the loan balance, which will be paid out annually, or offer a general partnership ownership interest, or a combination of the two.
Method #2 – Invest in Deal
Another way is to have a property management company invest in the deal and as a result, become general partners. For this method, the compensation will depend on the actual deal and the value of the property.
Method #3 – Bring on Investors
A third way is to have the property management company invest in the deal and bring in their own investors as well. The extra benefit of following this method is that it adds another layer of credibility (i.e. the property management company’s investors) and it adds another level of alignment of interests since the property management company and their investors have their own skin in the game.
Similar to method #2, the compensation will depend on the deal.
Method #4 – Ownership Interest
The final way that a syndicator can partner with a property management company is to exchange the property management fee for ownership interest in the general partnership.
The benefits of this method are three-fold. First, it establishes credibility right out of the gate for all parties. Two, the first-time syndicator can leverage the property management company’s liquidity or net worth to qualify for the loan. And three, since the property management company will likely bring in their own money and/or their investor’s money, it decreases the amount of money the syndicator must raise.
Are There Any Downsides?
The downside of bringing on a property management company as a general partner is that they and the syndicator are essentially married. Therefore, if the management company falls off the face of the earth, completely forsakes the property, or they turn out to be bad people, then the syndicator is going to have a very messy divorce. If this happens, the syndicator will have to buy them out in some form or fashion.
If you decide to follow any of the four methods, in order to mitigate your risk, you need to make sure that you have proper clauses in the contract that stipulates a buyout process. Also, you have to be careful about who you select as a property management company. (See All You Need to Know About Building a Solid Real Estate Team)
From personal experiences, I believe the benefits of partnering with a property management company outweigh the potential downsides, as long as you’ve planned for them in advance. I have successfully overcome the challenges mentioned earlier (i.e. lacking in credibility and/or liquidity/net worth) by partnering with property management companies on past deals using all four of the methods described above.
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