JF1419: How To Allocate Equity In A Syndication Based On What The Partner Brings To The Deal #SkillSetSunday with Jeff Greenberg

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If you’re a syndicator of any type, one issue that arises is how to allocate the equity based on what everyone is doing for the deal. If you found the deal and someone else did the underwriting, who gets what? That is just one example of a potential problem. Jeff has figured out a formula for how to make these decisions. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Jeff Greenberg. How are you doing, Jeff?

Jeff Greenberg: Hey, I’m doing fantastic, Joe.

Joe Fairless: I’m glad to hear it. Best Ever listeners, you know Jeff Greenberg because you’re a loyal Best Ever listener, and you were a loyal Best Ever listener way back to episode 47 (yeah, 47); Jeff was my 47th guest on this podcast. I titled it “Follow the well-worn path to success.” I also interviewed Jeff in episode 424, “How to deal with a falling-apart high stakes situation.” That was a fun story.

Today we’re going to be talking about how to allocate equity based on what your partners bring to a syndicated deal. As apartment syndicators, or as any syndicator really, there are different roles and responsibilities that need to take place, and if you have partners, then how do you determine what is valued over what? Finding a deal, doing the underwriting, doing the due diligence, getting the debt financing secured, signing on the loan – all that stuff.

Well, at my conference in Denver, Jeff approached me and he said “Joe, I’ve actually come up with a formula or a range for different responsibilities, and their weight as it relates to value.” So we’re gonna be talking about that… Jeff, I’m really excited; are you ready, my friend?

Jeff Greenberg: I am ready.

Joe Fairless: Awesome. A little bit about Jeff, really quick – he is the CEO of Synergetic Investment Group, has been investing in multifamily since 2007, has been involved in acquisitions of over 800 units, valued over 30 million dollars. Based on Los Angeles. Jeff, take it away. Tell us what was the inspiration for coming up with a structure.

Jeff Greenberg: Well, I have to admit for the most part it was desperation, but what it was originally is a group had approached me and wanted me to mentor them. This never started out with the thought of becoming a business, but I met with a group and we started doing training sessions, and as it moved along, we had people wanting to learn more and learning hands-on; I was telling them how to talk to brokers, how to get deals coming in. We continued that, and we started to get into some deals.

Once we did our first deal, we started thinking, “Well, how are people going to get compensated?” Well, the first time I said “Well, how much are you gonna be paying me for the mentoring?”, and since I hadn’t charged them for the mentoring, what they received was very limited as far as compensation… But then we went into a second deal and it started becoming more of a company.

We had to figure out how we were gonna fairly distribute this… This was great, because the group was doing a lot of the work of the company, and I felt they should be compensated… So we had to figure out some kind of system.

I wanted a system that emphasized those areas of greatest need, which as most of us know, is finding the deals, finding the equity and signing on the loan. Those I felt were the three highest priorities.

Then some of the minor ones were underwriting, doing research as far as market research, and research on the property… All that stuff was more for a minor role. So I put the emphasis on the major three. Those were the biggest pieces. Then we have the minor ones from there.

Now, we also set the company up where I have a deal lead, where one of my people will take on the role of the lead, and they’re pretty much the orchestrator. They will work with one of our underwriters. The underwriter needs something, they will go back to the broker, get information from the broker, and they go back and forth with the underwriter, or with someone doing research, and basically leading that particular deal.

So as a team lead, they’re also getting a certain percent. And those people doing the underwriting, those people doing the research – all are involved and they’re all getting a piece of whatever the sponsor’s cut is going to be.

I also have a team lead that basically he’s also the orchestrator of all the deal leads, and they go to him for a lot of whatever’s needed. For the most part, it doesn’t come to me until they feel it’s  a deal and I’m the last reviewer that will review it and decide if we’re gonna put in an LOI.

So all of that frees me up to do what I’m doing most of the time, which is networking, and bringing in the money, and meeting people, and sometimes bringing in deals, but for the most part looking for the equity partners.

Joe Fairless: One thing I didn’t hear as far as a major category (or even in the minor category) was asset management… So where do you put that?

Jeff Greenberg: Okay, so all of this was leading up… We do put in an asset management fee in there, which originally on our properties was either myself or my team lead, but as we have some very capable people that I’m progressively bringing up… So now one of the ladies – I’ve put her into position on one of our properties as asset manager; I’ve been training her. We’ve got another lady that’s gonna be taking over an asset management on another deal…

When we’re going through the due diligence and closing process, it’s pretty much all hands on deck, but everybody is working on different pieces. My team lead also happens to be a mortgage broker. He’s pretty much handling looking for the loans and taking care of the debt end of it… So that takes a big piece off of there.

As far as going to the properties, walking the properties, a certain number of us will go and walk the properties and do most of that due diligence.

Joe Fairless: So we’ve got — according to you, the main categories are finding the deals, finding the equity and signing on the loan. Then you have minor categories, and you’ve got a deal lead person — a deal lead and a team lead. That’s how the team’s structured. So with the major categories that you said – finding the deal, finding the equity, singing on the loan – what equity is associated to those?

Jeff Greenberg: Those, I believe, are at 15% of our cut. So we divide whatever the sponsor cut is and I believe they’re somewhere around 15% each on those. The team lead gets a cut no matter what, and I get a cut no matter what in the beginning, but right now both of us are also getting pieces of the other ends of it, because we’re wearing many hats, so we’re also getting some of that as well.

Joe Fairless: Do you make a distinction between — we’ll go with finding the deals… Do you make a distinction between an off-market deal with no brokers, and a fully-marketed deal?

Jeff Greenberg: I make a distinction between somebody that just got a deal from an e-mail blast coming in, or a deal that was brought in through a relationship. That’s the main thing. If it’s off-market or not, if it’s something that we wouldn’t have seen on our own, but because they’ve established a relationship, that’s a higher priority, because that’s what I wanna encourage.

As I said, I wanna reward those things that are most valuable, and building relationships with brokers is one of the most valuable… Or getting off-market, non-broker deals, either way.

Joe Fairless: What would be the range…? So you’ve got the 15% for finding the deal; I imagine the lowest percent would be the e-mail blast, and the highest percent would be if they know an owner directly and there’s no broker fees involved… So what would be the range there?

Jeff Greenberg: Well, we haven’t really dealt with it exactly yet… This is a work in progress. [laughter] But we’ve done two deals under this system so far, so we’re kind of working on it. I can’t give you exact numbers, but like I said, the high end would be 15% of the deal, if it was something through a relationship. If it was something from a blast, it would be something lower than that…

Joe Fairless: Got it.

Jeff Greenberg: Those percentages would be distributed out somewhere else, different parts of the deal.

Joe Fairless: And then on signing on the loan, same thing – if it’s a recourse, maybe a distressed property, versus non-recourse, stabilized value-add deal, 15% is the high end, and then it’d go lower based on more stabilized non-recourse loan?

Jeff Greenberg: Sounds good, but we haven’t gotten that refined yet either.

Joe Fairless: [laughs] Fair enough.

Jeff Greenberg: But the main thing is I wanna encourage members of my team – most of them are accredited investors themselves – to sign on the loan, as opposed to having to go outside of our group, which would probably cost us more as far as what we would have to give up. So I would rather give it to team members, that opportunity to sign on a loan.

Joe Fairless: Did anything change from the structure between deal one and two?

Jeff Greenberg: On deal one I took the entire acquisition fee, mainly because I was spending my time training them. On deal two, my company took half the acquisition fee and then we split the rest of it amongst the group, for all the hard work they’ve been doing.

Joe Fairless: Got it. And with the ownership for deal three and for the foreseeable future, if I have 15% ownership, and say the only thing I did was I found the deal through a relationship, so I’ve got 15% ownership – am I sharing 15% on all the profits from that? So 15% on the acquisition, 15% of cashflow, and any other fees?

Jeff Greenberg: It would be 15% of the sponsor’s cut, and yes, it would be 15% of the cashflow after the pref, if we’re doing a pref. It would be 15% of the sponsor’s cut on the equity end of it, it would be 7,5% on the acquisition fee, because the company is going to hold on to 50% just for future names.

Joe Fairless: Got it. Fair enough. And that’s for funding, for due diligence, or getting new deals, deposits, that sort of thing?

Jeff Greenberg: Yes, as well as company overhead.

Joe Fairless: Right. Yeah, that too. So on the minor stuff, the underwriting, the market research, the property research – how come the underwriting is in the minor category?

Jeff Greenberg: Well, because it’s not as mission-critical. I mean, yes, it needs to be done, but there’s a lot of us that can do that. It’s probably one of the less desirable ones, but we do have a lot of people that are good with spreadsheets and would rather do numbers than talk to people, but  I just didn’t wanna put it up in the ranks of the priority… And so far, we haven’t had a problem as far as encouraging people to do the underwriting. That hasn’t been an issue. But typically, they’re doing other things as well.

Joe Fairless: And the asset management – can you clarify that? Is that in the minor category?

Jeff Greenberg: Well, it’s not that it’s a minor category; that one’s one we’re tossing around right now, because we have put in there a 1%, and unless it’s a large deal, it’s not a lot of money to be an asset manager. That’s pretty much why I’ve been doing it. In fact, for the most part, we haven’t taken asset management fees anyway.

We’ve got a couple of deals that are value-add deals, and initially there’s not money going to the investors, and I don’t like taking an asset management fee until the investors start getting money. And even on that, it’s not gonna be a lot of money, even at 1% or 2%. It’s a very important responsibility, so we might take some money from the property itself as the asset management fee, and then we may also put some other money into it from our side, from the sponsor’s side of it, just to make it more desirable.

For the most part, the people are learning how to be asset managers, and we’re overseeing it. I’m keeping my eye on everything, but a lot of this is people are learning how to do it.

Joe Fairless: And I know that you’ve done it on two deals, so it’s still in evolution, or a fluid process, but I’m wondering if an individual just isn’t working out, after you closed, but you’ve already assigned these ownership percentages, what recourse do you have, if any?

Jeff Greenberg: Well, I have complete control; there’s no signed contract.

Joe Fairless: Okay. So it’s a handshake thing, where “Hey, you get 15%”, “Okay.”

Jeff Greenberg: Yeah. And we’ve actually had someone that we did have to let go, and they do have some ownership in one of the properties, and they’ll still get that ownership. They may not get as much, but they’ll still get some ownership. We left on good terms, and they did the work that got the property. They’re not involved in running the property right now and the work that we’re doing now, so I feel okay with cutting back slightly on it… But the acquisition is the big thing; you and I know that that’s the first part, and then the next part is running the property, but still, that’s something that my time is freed up a lot more for, so I can do a lot more of that. Because they’re doing a lot more of the acquisition part of it, I can have my time available to oversee a lot more of that. I kind of put myself in that spot.

Joe Fairless: And with it being a handshake thing, have you had anyone say “Well, wait a second, Jeff… You’re a great guy, but I wish we’d have something on paper that showed that I own 15% for doing this work.”

Jeff Greenberg: Yeah, once we’ve closed, I have given out a document stating what their percent ownership is on that. So I’ve done that, yes.

Joe Fairless: Cool. What else, if anything, haven’t we talked about as it relates to this structure, that you think we should talk about?

Jeff Greenberg: Well, the important part is who you’re working with. As I said, we did have somebody that had to leave, and I don’t know that this is gonna work for everybody.

This team I have right now – we work as a team, and it’s a beautiful thing. We communicate a lot on Slack, so I have the opportunity to look at the conversations going on and I see people helping somebody out. Somebody has a family issue, “Can you help me out and cover for me while I’m doing this?” We’ve got a new person in that everybody was jumping in and training…

If you don’t have people that are willing to help other people out and help everybody grow and help the team grow, then it would be an issue, and we’ve had that situation, that we’re more into “Me, me, me”, and that just didn’t work for the team, and definitely could be a conflict.

I wanna back up on kind of the premise for this whole thing, and I talked to several other people that I know that have had teams of six people or so, all equals, kind of working on deals, and for the most part I was discouraged. I was very discouraged with the results that they were getting, because this person wasn’t carrying as much weight as somebody else, somebody else had more time, and they were upset that they should get more, and it’s just a can of worms… And that was the biggest hindrance, because I’ve got a couple women that their husbands are working, and they have all kinds of time.

I have other people that are working full-time jobs, and are doing this at night or in the morning, or whenever. So obviously, not everybody has the same amount of time. These are mature adults that have a life. They have kids. Well, most of their kids are grown up, but they have grandkids, so they don’t have the time.

So I can’t expect everybody to put in the same amount of time, and I had to think of a way that would be fair, and that’s why I did it on a task-based system, where based on what task they were performing, they would get compensated. So far, everybody seems to be happy with it.

Joe Fairless: This is great. As I mentioned at the beginning of our conversation, this is a  question that I get fairly frequently, but I guarantee you comes up much more frequently internally amongst team members than what actually comes to the surface… So this will definitely help people think about how to weigh certain things.

Jeff, how can the Best Ever listeners get a hold of you?

Jeff Greenberg: Well, you can get a hold of me at jeff@synergeticig.com. I’m on Bigger Pockets all the time, you can go to my website, synergeticig.com, and you can get a hold of me. Any of those are fine.

Joe Fairless: Outstanding. Well, Jeff, thank you for being on the show. This was really interesting, to hear the different allocation of equity for certain tasks, finding deals, finding equity, signing on the loan, 15% for each, and then some other things like underwriting, market research, or any research in general, plus asset management have a lower percentage. Then you have a deal point person and a team lead point person, and then you’re also involved from a CEO standpoint.

Thanks for being on the show. I hope you have a Best Ever day, and we’ll talk to you soon.

Jeff Greenberg: Thank you very much, Joe. Thanks for having me.

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