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Strategy Saturday
SS52: Reasons Why I Turn Down Partner Deals
December 12, 2021
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SS52: Reasons Why I Turn Down Partner Deals

Real estate investing is becoming more and more popular; with new investors entering the commercial real estate arena every day. It is important for investors to be discerning on where (and with whom) they invest their money and their time. In this episode, Charles discusses common reasons why he declines syndication and joint venture deals.

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Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing reasons why I decline partner deals. Now as real estate investing becomes more and more popular. Our company is regularly contacted to partner in joint venture in syndication deals. Now we welcome these inquiries, but we typically turn them down and I wanna share some reasons why my firm turns down these deals, what we look for and how this can help you be a better partner, joint venture partner, and syndicated. So, number one reason is that someone just forwards us a broker’s package with no underwriting. And they’re hoping we will review. We haven’t seen the deal will underwrite it and then will them in the deal as finding the deal. Now this just doesn’t work. We require pretty much any group’s gonna require you to underwrite the package and then bring it to a group.

Charles:
And then you say, well, this all checks, all these boxes. You check now they’re underwriting and your group can make their decision. The next one is no experience or not enough experience in real estate investing. Now that does not require that each person on the general partnership needs to be an experienced indicator, but the lead partner partners need to be experienced working with property managers, contractors, lenders, raising money, et cetera. And it’s important that this happens because in addition to not having an experience, we normally hear new syndicators name drop well known syndicators and investors on deals. And once we drill down and we find out what this well known investor is, is doing, usually they’re just signing on the loan. You know, they’re not providing any additional value. They’re not providing any capital no investor capital. And this is, is not a true general partner that you’re working with.

Charles:
This is just someone that’s signing on debt. You know, a true general partner invests their own money, raises money for the deal and assists the group with asset management or investor relations, you know, finding dealing with contractors, all this kind of stuff. Now, someone that just signs on debt only cares if the deals value drop below the value of the debt. For example, you know, you purchase a property for a million dollars, a key principle. So the guarantor on the loan signs on a $750,000 loan, they only care if the property doesn’t drop below $750,000. And if it makes money, they get a percentage. It’s, it’s not a true partner, a true partner’s one that wants this million dollars property to, you know, make it to 1.2, five or 1.5 or 2 million. So they can actually sell it and make a profit for themselves.

Charles:
And also their pro their partners, their investors. So next one is no experience with a specific property. Now they, for example, are multifamily syndicators, and now they wanna develop a property, but they have, you know, no previous construction experience. Well, that’s a big one, or it’s going for a different asset class, right? They were working in multifamily. Now it’s self storage and there’s no one new on the team that’s going to help them bridge that experience knowledge gap. Another one now is big is because bridge loans are, are big now. And does the group know how to manage a deal well enough to utilize a bridge loan? I mean, bridge, loan’s a, a higher risk source of financing source of debt. But the thing though is that it can be used correctly, but there’s gonna be shorter timeframes on it. And there’s also most likely gonna be increases after three years in the cost of that debt.

Charles:
If it’s not refind or sold, next is not putting enough money into the deal themselves. Now, a group wants to be a leads indicator on the deal, but is bringing little or no money themselves to the deal. Well, this is huge red flag. It is one thing to find a good deal and with little money and bring it to a group. But the group that is the lead operator also needs to invest their own money. Typically we want to see the lead group, find the deal, underwrite it, and put it under contract with an earnest money deposit before we partner right, shows that they believe in the deal to putting their own money up and in today’s day and age, a lot of that money’s going hard very quickly. Next is not bringing enough money to the deal. Now you want the leads, indicators and operators to raise a substantial amount of the capital.

Charles:
And I’m not saying like 75%, but 15% plus something around in this, in this ballpark. Usually we’ll see the right 20% or 20. Yes, with big syndicators. There are normally several partners on the deal and they all pitch it, but you want to see an operator believe in the deal. And it’s usually normally shown by raising money and investing their own funds themselves. Another one is that when we’re told the story or what the business will lane is it comes down and there’s one big investor or partner in the deal. And that could be a limited partner. That could be someone else. And when it’s one big investor Hey, it’s a 2 million raise, but we have someone that’s putting a million dollars in that’s a huge red flag or it’s also someone that and that’s for two things, first of all, they might not end best, right?

Charles:
So if someone’s putting in half the money on the limited partner side, they could just say, Nope, and it’s not like any of this stuff is legally binding until they sign the documents and wire the money. So there’s not really recourse. You have, nor would you want to go down that route. And the second thing is too, is that if you are a large investor on a deal and it’s coming to the you know, the eighth hour, right, it’s, it’s something where you can now rewrite the deal. And you are able to maybe put yourself more of a, a higher spot in the deal. You might want to control the deal. And if this group has no other way of raising, say that million dollars you might be taking that limited partner now might be on the general partnership. And this is a problem.

Charles:
If you are raising money for the deal as well. So one big investor or one big partner, it’s a huge red flag. And I’d rather see out of that 2 million raise, I’d rather see a ton of 50 and a hundred thousand dollars investors versus one that’s 500 or a million, unless there’s some vetting done to make sure that this person is going to actually wire the money in and actually wants to be a limited partner. Next is a short timeframe now to work on a syndication deal properly general partners, the 45 plus days before closing, this is something for us. I mean, we wanna be brought into a deal if it’s something that we’re not finding we wanna be brought into this deal right around the time that the PSA purchase and sale agreement is signed even better when they’re negotiating out the LOI letter of intent, but 45 days allows you to review the property yourself with your own underwriters.

Charles:
It re allows you to you know, craft all the marketing materials, send them out to your investors. It allows you, you know, 30 plus days to actually speak with investors. I mean, the last thing you want to do is send on an email and tell ’em, Hey, you know, money has to be in by next Thursday. And you’re, it’s totally unprofessional. And I would never invest that way. So when I bring it, I will listen to people that have these deals, but we will usually turn them down because, you know, obviously someone fell out from their team and we’re just kind of an afterthought, which we don’t want to do. And we also, you know, when you’re bringing an investor money to a deal, you have to make sure that everything lines up next we see is inconsistent blitz with risk or experience.

Charles:
Now, a lot of new syndicators do not want to share the deal in order to get it done correctly. Now. So the big thing with the commercial real estate and syndications, it’s a team sport. It really is. You need people. Usually the person sourcing the deal is not gonna be the person raising the majority of the money. And the person doing asset management is probably not the person that was underwriting and all this type of stuff. And someone coming from like a single family, real estate background usually does everything themselves. So coming into commercial is a completely different mindset. And, you know, I recently turned on a deal since a new group did not wanna partner with a group I work with that’s already in the market where this property is, and they had several assets in this market already. And this asset would’ve just been plugged into the existing group’s kind of system.

Charles:
I call it you know, you’re utilizing their contractors, property manager, asset manager, backend software, et cetera. And this is important if you’re li you know, if you’re investing as a limited partner or as a general partner, if the group you’re partnering with already has a system set up there, right? They already have lay like two or three properties, let’s say or more. And they have their property manager. He’s perfect. They have a contractors for doing all the renovation and value add they have a asset manager that’s visiting there from their group or on calls with a proper from manager all the time. They have the backend software, all set. I mean, this is just a plug-in plate. It’s really, as I call it like printing money because they’re utilizing their whole system, they have already set up, they spent time, years fine tuning, and now you’re just plugging in a new asset to it.

Charles:
And you’re also probably getting a better management fee in contract fee all across the board. Cause you’re getting that scales of economy. So when I hear someone that doesn’t want to do that and give a part of the deal to give it to having the lead be a seasoned operator, that’s something where I probably will turn down next. And for final is sometimes it’s just the wrong time. You know, we just close a deal or we’re closing one now. And a lot of our resources are in there. I mean, once a property closes it’s really three months to six months and what I call the initial stabilization period. And what that means is that you’re really figuring out everything about the property. Now, obviously you did your due diligence. You you’re underwriting on the property, but there’s things that you just don’t know about the property.

Charles:
And this is where that kind of washes out. And this is where issues that, Hey, I thought, you know, we, this roof was gonna be 12 months on the road, but now it’s happening now. Well, that’s fine, but we’re going to have to bring that contractor right now. We have to do this and you really figure out a hundred percent what’s going on with all the units, the property and fine tune. What your value add business plans gonna be at that point in the sense of timeframes, right? Sometimes you might say we had it on a property before where we had a sewer backing up under our unit. We go, Hey, when this unit vacates and we’re thinking maybe like, you know, 12 months or something, you’ll probably vacate. It actually ended up like two weeks after we bought it. So we were just, okay, fine.

Charles:
This money was in reserve. Now we’re doing this work. Now it’s vacated, let’s pull up the floor, let’s do it correctly, then renovate it, the unit and then re-rent it out. So you’re, you know, anything that happens, you can’t control it, especially when you’re buying a hundred units, you have a hundred different families, hundreds of different people in that, in that complex. And now you are trying to figure out actually, you know, fine tuning the business plan for actual events. Cause the business plan is really just a proforma of what you thinks can happen. And if you do it correctly, you know, everything fall into place for the most part. Right. But the problem is that if you haven’t said, or haven’t managed or estimated issues to happen, that’s what the problems start. So it’s important that timing is correct for you and also your investors. And because you might have investors, the bulk of your investors might have just invest in your last deal and you’re bringing a deal to them 30 days later, right. Where you really should probably be working on the deal you just closed. But it’s it’s all, it’s all timing for the, the most part when it comes to these syndications. So please remember to rate, review, subscribe, submit comments, and potential show topics at global investors, podcast.com. Look forward to two more episodes next week. See you then

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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