7 steps to make it work
It’s been said that a CRE investment partnership requires two types of people: someone with capital and someone with the knowledge to put that capital to work. It’s also been said that these investment partnerships can be more difficult to nurture and maintain than a marriage.
Forbes columnist Amanda Neville notes that all businesses partnerships have an 80 percent failure rate, a full 30 percent more than marriage. Another estimate reveals that roughly “70 percent of real estate partnerships fail because two equal partners cannot agree on anything.”
Nevertheless, a successful CRE investment partnership isn’t impossible. In fact, there are many successful examples. When comparing those that work and those that fail, a framework appears – one that will guide your next move.
Be a realist
CRE means big money, which can mean bigger risks, which in turn can mean greater excitement when an opportunity presents itself. While it’s perfectly okay to enjoy the adrenaline rush, don’t be overtaken by it. It’s important to stay grounded and firmly entrenched in reality to be able to make well-thought-out decisions – specifically as they pertain to the items outlined below:
Establishing a ratio, level of participation, and structure for the partnership
When people enter a partnership, it’s because it makes sense for two or more parties to pool resources for the mutual benefit of all involved. In CRE, though, risks and rewards are higher – each decision is not only important, it can potentially be contentious. In 50-50 partnerships, disagreements can lead to no decisions at all and, as a result, place the venture in jeopardy before it even had a chance.
An option for a 50-50 relationship is a real estate limited partnership (LP), as opposed to a general partnership. One individual is the general partner who is responsible for the day-to-day decisions, whereas the limited partner is a passive investor.
Limited liability companies (LLCs) are also an option. To avoid gridlock or conflict, individuals who comprise an LLC can be designated as “managers” or “members.”
Have common objectives
Before meeting with potential partners, understand your own objectives for wanting to invest in a commercial venture. What is your ideal rate of return and how much margin of error has been built into the investment from a break-even perspective? Is it a long-term investment that is intended to generate income for decades? Or is it a mid-term project that ends in a lucrative sale? Essentially, what is the exit strategy?
With your own answers to these questions, you can better assess potential partners and join with those who share your strategy.
Consider the end at the beginning
This is perhaps one of the most important things to consider, and the most difficult. It’s also one of the main reasons to remain grounded and not get carried away with the excitement of the partnership.
Simply stated, markets change and life happens – so it’s critical to have an exit strategy for yourself and/or your partner. Whatever is decided should be in writing so all parties are protected.
Be fair
This is common sense, but it bears emphasis: If you are the person in charge of making decisions, you will be the one spending other people’s money. It’s imperative to be more frugal with your partner’s money than you are with your own. If you are making operational decisions or advocating a certain strategy, this strict fiduciary duty must guide everything you do.
Be transparent
Part of being fair is transparency. It means consulting with partners – even the silent kind – on really big decisions, as well as informing them of what’s happening with the project. Is a tenant moving out? Is there a fantastic tenant on the horizon? Is a renovation or repair work in the wings?
If there are questions from partners, respond immediately. Greater care in selecting partners with the same CRE objectives helps to minimize criticisms.
Get it in writing
At Morris Southeast Group, we cannot stress enough the importance the getting everything in writing. This is, after all, business. While CRE certainly has its share of risks and rewards, a written, highly-detailed contract between you and your partner(s) is a necessary tool to help offset risks and disagreements while increasing rewards.
For a free consultation or to learn more about our CRE investment opportunities or other services, call Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.
Tags: CRE Investment Partnership
