Each week for the Best Ever Round Table, the three Best Ever Show hosts — Ash Patel, Slocomb Reed, and Travis Watts — come together for a deep dive into a commercial real estate investing topic.
The Best Ever Show hosts share the second episode in the mini-series, “Convince Me,” where they debate various aspects of commercial real estate strategy from different perspectives. In this episode, they discuss the advantages and disadvantages of choosing syndication as a partnership structure versus a joint venture with active partners.
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Slocomb Reed: Best Ever listeners, welcome to the Roundtable. I'm Slocomb Reed, an apartment owner-operator and an investor-focused real estate agent in Cincinnati, Ohio. Today I'm joined by Travis Watts and Ash Patel. The hosts of the Best Ever Show come together every week to dive deep into a commercial real estate investing topic, and today we're continuing the mini-series called Convince Me. We're going to have a discussion about a particular strategy or business plan within commercial real estate investing, and hopefully, by taking both or all sides in the argument, you'll have the opportunity to learn from what we're doing and what you want your investing to look like in the future.
Today's topic - convince me that syndication is a better partnership structure than joint ventures with active partners. I am an apartment owner-operator, I have the ability to find and execute on repositions within the apartment space... Tomorrow I close on one actually, a deal where I'm 50/50 partners with a JV who's bringing 100% of the capital, because I'll be able to get him all of that capital either with a sale very quickly, or with a cash-out refinance, leaving each of us with a 50/50 equity in a deal where none of our own capital is deployed.
I will say, I'm very picky about who I partner with, and I must have some prior working relationship with them before we go into a joint venture together where they remain an active partner, even though I'm the one with the expertise. So question - why should I be syndicating if I can keep doing JV deals like this with other partners' capital? Travis, I'd like to pass this to you.
Travis Watts: Sure. Hey everybody. Travis Watts, full-time passive cash flow investor and director of investor relations with Joe Fairless at Ashcroft capital. So first of all, congrats on your new deal. That's quite an accomplishment. So I would say this, I would say you do you; there's nothing wrong with your strategy or your plan if it's what you love and enjoy, as we've discussed before, if it's something that you're good at.
Syndicating deals is not all rainbows and butterflies with a lot of people like to think it might be. Sure, you might make more money, potentially, but you're also taking on more liability. You're now managing people's money to the tune of possibly hundreds of different people, depending on the size of your deal. You're at a higher risk for being sued... You've just got more people to deal with. So you're always going to have people problems.
So I'll put it to you this way - I'm a full-time LP, a limited partner, and if I had to be active again and not an individual investor, I would rather be a JV partner with one partner or a small group, than to be a GP. That's just my personal take on it. But again, it comes back to your highest and best skill set. So a lot of pros and cons; Ash will be able to dissect it a lot further, but as we've spoken about before, I'm all about do actively your highest and best, and invest passively. So that's always kind of my take on it. But since we're talking about JV, I have not personally done a JV and I have not been a GP. I do not intend to necessarily do either. But I would definitely lean towards being a JV if I were to have an opportunity that made sense where I could be a capital partner, or something like that.
Ash Patel: Hey, Best Ever listeners. Ash Patel. Travis, I love what you said at the very end there. If you want to be an active partner, you're going to choose the JV model, versus the syndication model. Now, the syndication model benefits the sponsors and the GPs; it does not benefit the limited partners, other than it shields them from some liability. But in terms of returns, it's the people that are on the GP side that benefit the most. The LPs are predetermined to make a certain amount of return, and a certain percentage of that return.
When we're doing deals together with other active investors, they would never settle for the syndication model where they're an LP. They want the same interest that you have. So syndications will benefit the sponsors. Joint ventures benefit everybody. And there's a lot you can do with joint ventures in the operating agreement, where certain people may not be called upon if you have cash calls, capital calls; other people - they can limit their liability on deals.
So as an active investor, if I'm partnering with somebody, I'm going to pick the joint venture route. I invest in other people's syndications as well, and I want to be passive. I don't want to be bothered; just take my money, bring it back at some point.
Slocomb Reed: Interesting. This is not the direction I expected the conversation to go in. Specific to whether or not to JV or have active and limited partners, what are your perspectives on - let's start with control or liability. Let's say that from the perspective of Ash, you're the person who's able to find, take down, negotiate the deal, and then execute on a business plan. Travis is more often the capital partner in a JV-type situation with a limited partner in a syndication. How do you guys respond to the amount of control that a general partner has in a syndication; limited partners don't necessarily have a say in the execution of the business plan, or if snags are hit along the way, whereas a joint venture partner bringing capital is active in the deal and actually has some say, or can have some say in the execution of the business plan, and how to adapt to changing circumstances.
Ash Patel: I'll start. So if you are one of many LPs, you should not expect a say in the deal, unless things are going horrifically wrong and you can somehow corral all the other LPs together. Even then, based on the documents that you signed, you have very little say, unless the operators are negligent. Now, if you are one of two or three or four LPs, even though the documents say that you don't have a say, you actually do, because you have a small team of people, a small number of investors on the deal; you should have the GPS ear, you should have all their contact info, and you should communicate with them often. And for active deals, if you are on a joint venture, everybody has a say, and I don't mind giving up control of properties... And my philosophy is if you want to go far, go together. So the more, the merrier.
Travis Watts: Great points. I'll dive in and kind of compare, as an LP investor, just having spoken with thousands of other LPs as an investor relations rep for years now - a lot of these investors are a doctor, a dentist, a lawyer or attorney... They're definitely not active real estate folks, for the most part. So when you think about investing in stocks - because most of us were brought up understanding that fundamentally, these are not the stock pickers. These are not the chasing the hype or trying to beat overall markets. These are the mutual fund and the index fund investors. So again, do you have any active say in investing in index funds? No, it's a diversification piece to your portfolio.
Something you talked about earlier, Ash, was about the LPs and how much they benefit, versus not benefiting. I think it has a lot to do with what the person is trying to get out of the investment. So if I said for example, I need $200,000 a year in passive income for whatever reason; maybe that's retirement, or supplemental, or whatever it may be. Well, if I sold a business or something that I was doing actively, or I was a high-income earner, and I put $5 million to work at 8% a year, that's $400,000. Money is not always the motivator for LPs. Sometimes it's just keeping the ball moving and rolling, and maybe not being satisfied with the stock market or alternative investments... And the yield, even at 6, 7, 8, 9% annualized yield, which may seem low in your world, is actually quite high when compared to traditional yielding investments - annuities, or CDs, and money in the bank, and bonds... It's a hell of a return in perspective of that. And I think that's what a lot of LPs are used to seeing.
But to your point, the reason an LP may not be a good fit for someone is exactly what you two pointed out - you don't really have an active say in it. So if you're the person that thinks "I can do it better, I can do it best" or "I wouldn't do that, I would do it this way." If you like to have the control, then an LP position may not be appropriate for you; but that's not who most LPs are. In my experience.
Slocomb Reed: Let's take the perspective of a more actively involved person, to Travis's point about recognizing your personality and your skill set when it comes to these kinds of investing relationships. I'm going to be pro syndication here, and I don't know if you'll be able to convince me off of this one. If I am the person involved in the business relationship, I am on the team that is capable of finding, underwriting, negotiating, getting my offers accepted and executing on a business plan, I want to know that I can keep a lot of the upside, or as much of the upside of this deal as possible, while also delivering for my partners who are bringing the capital.
In the example of the 50/50 JV partnership, the better I perform, I get half, and my partner gets half. And even if that partner is not materially involved in the decision-making process, they're just a yes man or a no man, they get to come along for the ride and see some serious gains. Whereas I can structure a syndication deal that not only is more on paper limiting with regards to the capacity of the people who don't have my expertise to make decisions about the deal, but also it can be structured in such a way that my limited partners can rest assured that they will get returns that they are expecting, but I can leave a lot more upside on the table for myself with the way that that deal is structured. Maybe not necessarily the way that the majority of apartment syndications are structured now, where 70%-80% of the equity is going to limited partners, and as the GPs we're collecting acquisition fees, and asset management fees, and making money along the way... But I can structure it in such a way that I know that I get to keep more of the upside than I would in a JV, while also delivering the returns that my limited partner investors are looking for. Ash, what's your take on that?
Ash Patel: I think what we're doing is focused on long-term relationships. So everything you do, you want to make sure people benefit appropriately, but not disproportionately. Because Slocomb, if you and I are partners on a deal, and I do very little of the work, I bring very little of the value, but I get 50% of what the deal spits out and you get the other 50%, it doesn't set yourself up for a long-term relationship, and you're not going to want to partner with me again on future deals. So it's a one and done.
And in terms of your compensation, you can do waterfall agreements. So with LPs, if you're hitting a homerun, LPs get to benefit, but then if you really hit it out of the park, you can have a waterfall where you get to benefit disproportionately than the original payout.
So really, the answer is focus on long-term relationships, and identify the value that each team member is bringing to the table, readjust if you need to. In a joint venture it's easy to readjust, modify the operating agreement, but it requires having those tough conversations. And I've been there, I've been in JVs where a partner that I thought was very gung-ho in the beginning - it turns out he should have been a passive investor, because I ended up doing all of the work, and it wasn't a fair shake. So it doesn't set yourself up for a conducive work environment; you're not going to be happy knowing that someone else is benefiting from all of your hard work disproportionately. So have those tough conversations and focus on long-term relationships.
Travis Watts: Great points, both of you. I always think back to the business relationship, the partnership of Joe and Frank at Ashcroft. Frank had all the asset management and underwriting experience, spent 7-8 years with a publicly-traded firm doing value-add multifamily, so he had the brains for this business, he had the connections, he had the broker relationships; what he didn't have was a network. So here comes Joe, with his Best Ever podcast, Best Ever books, Best Ever conference, and a wide network of mentoring and coaching. So that was the yin and the yang. So even though they're not structured as a JV, they were a good co-GP fit. So that's why that's worked long-term, and I think that's a great thing to look for in a business partner.
The other thing I want to hit on is knowing your value of your time. I made a video years ago talking about single-family stuff, and I was like, if I can do a passive deal with a 10% annualized return as an LP, just for example purposes, or I would get a 15% annualized return doing an active single-family deal, I would take the 10% return, because as I calculate my time of finding the deal and underwriting and placing tenants and hiring property management, and dealing with construction, my time was like - I don't know, $15, $20 an hour; it just wasn't worth it. So you've got to know what your time is worth as well.
Ash Patel: Hey, I do want to add - Travis, incredible point. And it's something that I've used as a benchmark for a lot of years. I started investing in Ashcroft in 2015, I think. And at the time, the returns were over 20% annualized returns. And I looked at my own deals, and I thought "I'd better be earning way more than 20% if I'm going to put my time into this." So right now we have a lot of active investors who are making single-digit returns. Why are you doing that? Put your money with an experienced operator that can return double-digit returns, and you have no time spent on these deals. So thanks for making that point.
Slocomb Reed: Ash, interesting thought on that. One of the ways that I have advised people to think about how active they should be when it comes to the potential returns on a deal is to start with a baseline of what their capital could be doing if they were invested passively, and thinking about their active returns as the difference between that number and the returns that they will achieve as an active investor.
So to your point, when you can make 20% passively, but you can make 30% actively, your activity is really only worth 10%. But if you're at 20% passively and 50% or 80% actively, then you know being an active investor makes a lot more sense in that regard.
Ash, Travis, you're doing a great job of making excellent points, you're doing a terrible job of disagreeing with me. So let's go for closing statements. I'd like for each of you to start by picking one - which is better, JV or syndication, and make your case. Let's start with Ash.
Ash Patel: If you are a passive investor, stick with the syndication model; if you're an active investor, go with the JV model. They're both great tools, but you've got to figure out what side of the equation you fall on and what benefits you the most, and what benefits the entire partnership as well. So I don't know if that answers your question, but...
Slocomb Reed: It doesn't. You still have to pick one. Make a case for one of them.
Ash Patel: Okay, so I'm an active investor, right? I'm picking the syndication model. It's great; I get to put as much money or as little money as I want into my own deals. I take on LPs, and we run the show, our team runs the show, and everybody wins at the end. These LPs, the passive investors - they don't want to be involved. They don't want to read financials, they just don't want to hear anything. They just want their check a couple times a year. So for me, I'm going to pick the syndication model.
Travis Watts: Great point. So obviously, in combination with LP, JV, GP - of course, I'm an LP and I advocate for that, but it's not right for everyone. So as I said earlier, if I had to be active, I'll take it from that approach - I would choose JV. You have to know yourself; this is all it comes down to. You just have to know you. I work better in small groups, I work better one on one, or in a small group of two or three, than I do with a group of 100. And that's just me.
So I'd rather have a really trusted friend or partner that I do business with, than having the unknowns of 200 people coming into my fund, and dealing with all these different personalities and wildcards and things that pop up, and registration name changes, and tax complications, and everything else. But to that point, could there or is there generally and statistically speaking more money to be made as a GP? Absolutely, if you're doing these large syndicated deals, for sure.
So it depends on what you're chasing... As I mentioned earlier, not everyone is just solely money and bottom line focused. I'm more about working with people I like to work with, and little creative outlets and niches.
Slocomb Reed: Last point from me, I'm gonna end up arguing in favor of both, but one of the reasons I like being a JV is the ability to scale. I didn't say this at the beginning, but the deal that I close on tomorrow is just a four-family here in Cincinnati. I wasn't targeting four-families, but it's a really good deal. It's going to be really easy to convert, it's going to be really easy to profit myself and to make sure that my partner is getting really solid profit, really solid gains on that, too.
Joint ventures can be small. The smallest JV I've done is on a duplex; the largest I've done is on a 26-unit. You lose the ability to do the joint ventures though as you scale. I don't know many joint ventures on 100+ unit apartment complexes. When you get to that point, the ability to raise capital from the hundreds of people ends up making it a lot easier to take down those deals. But if you've got a four-family that's just too good of a deal to pass up, a joint venture where someone else is bringing all or most of the capital and getting a really healthy return on it, while letting you execute on the business plan is a solid way to go.
Ash, Travis, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this conversation about the differences between joint venture partnerships and syndication, please do subscribe to our show, leave us a five-star review, and share this with a friend who's an investor, who's having these same considerations themselves, so that we can add value to them, too. Thank you and have a Best Ever day.
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