In this episode of Actively Passive Investing Show, Travis Watts and Theo Hicks go through the 51 responsibilities of the general partner in apartment syndications. They talk about what general partners are doing behind the scenes with your capital broken down in three sections: pre-contract, contract-to-close, and post-closing. Tune in to learn what questions to ask the GP about their business plan, and/or how to use this information to create a successful business of your own.
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TRANSCRIPTION
Theo Hicks: Hello, Best Ever listeners, and welcome back to another episode of The Actively Passive Investing Show. As always, I’m Theo Hicks, here today with Travis Watts.
Travis, how are you doing today?
Travis Watts: Great, Theo. I’m doing great.
Theo Hicks: Well, today we are going to talk about 51 responsibilities of the general partner in apartments syndications. So as a passive investor, when you’re hands-off, bringing in the passive investment dollars, what are the GPs doing behind the scenes? This will be a sneak peek behind the scenes look at what the GPs are doing with your capital.
So Travis, do you want to give some more context about why we’re talking about this today?
Travis Watts: Yes, I’m excited to cover this topic, original blog post, I guess a Joe Fairless post… But it’s important to understand, both from an active and a passive perspective, what general partners are up to… Because I hear things all the time, like, why be a limited partner, like I am, if you could make a lot more money being a GP? I always kind of have to laugh at that, because the full-time job is like saying, why not be a firefighter? Why do you work at your office job? Well, it’s not for everyone. So with that, another title could be 51 reasons I became a passive investor. That was kind of what I was thinking as I read this blog myself.
Theo Hicks: I like that though…
Travis Watts: Yeah, so we’re going to cover 51 responsibilities of general partners for the transparency on active and passive sides. And we’ll break them down into three phases. So you’ve got your pre-contract, before you even find a deal, contract to close once you find a deal, and then post-closing after you close the deal. So Theo, any comments before I dive in? I’m just going to cover maybe 10, and then we’ll pause and go from there.
Theo Hicks: Yes, I just want to make one comment. So where do these 51 responsibilities come from? So we wrote the Best Ever Syndication Book that teaches people how to become apartment indicators… So this is based off of a very, very condensed version of that 450-page book. So we’re going [unintelligible [00:02:31].20] educate themselves on commercial real estate, and just jump into once they’re ready to go and ready to start their business, what are the steps that they take before we even see that first deal? And then what happens after they have a deal, and then after they close on the deal. So yeah, jump into these responsibilities.
Travis Watts: Yes, exactly. So we’ll stay high level with it, to your point; obviously, if we talked about every single bullet point, this is going to be a 10-hour episode, so we’re going to try and keep it in a normal timeframe, 20-30 minutes, whatever. So I’m going to dive in approximately 8-10 at a time, and like I said, I’ll pause, we’ll go through them.
So starting out right off the bat, pre-contract. So select a potential target investment market, and then evaluate potential target investment markets. Select 1-2 potential target markets, create a website, create a company presentation, who you are and what you do, define a target audience for a thought leadership platform. That’d be something like a podcast, for example. Create and grow your thought leadership platform – this is building an audience, obviously. Create an in-person meetup group, create a Facebook group or a Facebook page. So I’ll pause right there. That was quite a bit. Theo, any thoughts on those?
Theo Hicks: Yes. So basically, the two categories here are finding where they’re going to invest – so it takes time, they’re going to figure out what are the top markets, narrow it down, because ideally, especially when you’re first starting out, they’re just focusing on one market, and they’re not spread too thin; think hyper-specialized, hyper—they’ve become super knowledgeable on that market. But then at the same time, they’re not just doing that; they need to build up their brand, because how are they going to get passive investors if no one knows who they are?
So every single GP is not going to have a thought leadership platform like a podcast, a YouTube channel, a blog, a Facebook page, a Meetup group; they might not have all of those. But the idea here that we were teaching people is you want to have all of those, right? Because you want to hit as many different angles as possible to attract those passive investors.
And another really powerful thing that’s from a GPs perspective that I think is important to know is that by having this thought leadership platform, by having these in-person meetups, you know that they are essentially always going to be up to date on the important information about whatever asset classes they’re investing in. For example, having a podcast, they’re probably doing a podcast based off of what they specialize in; so if they’re a multifamily investor, they’re interviewing really successful multifamily investors, and then other people who are involved in multifamily investing. So property managers, brokers… So they’re building relationships, but they’re also building their knowledge base, so that they can learn from other people’s mistakes, learn some of the best practices and things to avoid.
So again, that first part, picking a target market is pretty straightforward. We’ve talked about how a passive investor can evaluate the target market once they look at a deal; obviously, from a GP’s perspective, it’s a lot more in-depth. And then the brand – why is it that they should have a brand?
Travis Watts: Exactly. Great points. And the only thing I’d add to that is newer general partners mostly approach me because I’m a limited partner with a lot of different operators, to pick my brain, so to speak… And the one thing I always advise is you’ve got to remember who your target audience is – high net worth, high-income individuals – so be professional. I’ve seen so many overviews with typos in them, with generic Google images that are blurry, it’s like, “Come on…” It’s a competitive space, and you’re trying to attract doctors and dentists, and people see through that instantly; not having legal disclaimers on things… Just be professional. That’s all I have to say. Alright, moving on.
So whatever we’re on, 11 through 20 or so. So we’re still in the pre-contract phase. Here’s a few other items for general partners in terms of their responsibility. Find, interview and select a property management company. Find, interview and select a commercial real estate broker, and/or brokers, plural. Find, interview and select a commercial mortgage broker or lender. And then find a business partner, find an accountant who specializes in apartments syndications, find a real estate attorney, find a securities attorney – I’ll cover that difference here in a minute – find a loan guarantor and then define the roles and responsibilities of each member of the general partnership, if you have multiple members, and then set a GP compensation structure. I’ll pause there. Theo, any thoughts on those?
Theo Hicks: Yes, so the big category here is the team.
Travis Watts: Yes.
Theo Hicks: So whoever the GP is, they’re not doing every single thing themselves. Even if they were knowledgeable on all these different things, it would be literally impossible for them to do it, because it takes so much time. So at this point, they will bring on all of the different people they need in order to manage the deal that your money is invested in. So you’ve got the property management company who’s going to actually manage the actual property and boots on the ground, the brokers who are going to find the deals and then go through that contract process… They need to get the financing, so they’ll work with usually a broker on that. Typically, you’re going to find a business partner. So there’s going to be multiple GPs; I’m sure it’s possible there’s one, but most of the time, there’ll be multiple GPs. And then obviously, an accountant for taxes. Travis will focus more on the attorneys.
A loan guarantor – this is usually when they’re first starting out, they’re going to need to have certain net worth requirements. So something a passive investor could possibly do [unintellgibile [00:08:04].24] going to be a GP, so it’s not necessarily passive and you don’t have the protections of the limited partner, but a way to make extra money would be to sign on the loan to provide them with that liquidity and net worth requirement. Once they get bigger, and they’ve done a couple of deals, they can do it themselves, but starting out, we teach people to do that.
And then since there’s multiple GPs, who is doing what? Who gets paid for what? So the passive investor, one of the things we talked about when you are vetting a sponsor or a syndication team is, who are the GPs, what are they doing and why can they do that thing? What is their background? What’s their experience that allows them to do that? So on the backend, that’s what they’re figuring out.
I’m a GP, I’m really good at asset management, but I am not a people person and I have no idea how to raise capital, so I’ll partner up with someone who maybe has a really big network, is really good at raising money… We’ll partner up and then together we’ll do syndication deals together.
Travis Watts: The only thing I want to highlight on the attorney stuff – there’s obviously a difference between a real estate attorney and a securities attorney. Some people confuse the two.
Simply put, a real estate attorney – they’re helping you with your purchase and sales agreement. Basically your loan docs, all things related to your lender, escrow, title companies, stuff like this. A securities attorney is helping you set up your company, structure your deal, be compliant, obviously, with the SEC and securities laws and stuff like that. So you need to have both if you’re going to be raising capital.
Theo Hicks: Exactly.
Travis Watts: Alright, I’m going to wrap up pre-contracts; we only have a few left. and then I’ll hand it off to you for contract to close. So last few to think about… Create a list of investor emails; you could use a service like MailChimp, for example. Any kind of mass email sending service, you’re going to have to have something like that. Find passive investors; that could be an hour-long conversation in itself. That’s a big one.
Theo Hicks: Yes.
Travis Watts: Build relationships with commercial real estate brokers, subscribe to commercial real estate brokers on market email lists, and implement marketing strategies to generate off-market deals. Underwrite deals, submit a letter of intent, an LOI, and negotiate a PSA. Any thoughts on these?
Theo Hicks: Yes, so basically, before this point, they’re not even looking at deals yet. They’re not even talking with passive investors yet. This is all the foundation–
Travis Watts: Yes.
Travis Watts: —set first, ideally. Not everyone does this, but ideally, they have the foundations set first, so that once they start talking to you, they have the ability to take down a deal. So you’ll see that nothing we’ve talked about so far was actually looking at deals, analyzing deals… So they’ll start looking for the money first, generating verbal interest, and then they’ll start focusing on those relationships with brokers to find those on-market deals, as well as potentially off-market deals… And then they’ll also start doing things to generate off-market leads – different types of mailing services and things like that. Again, some GPs might just focus only on market deals; it’s really going to depend. But the whole point here that we wanted to make is that the best sponsors are not just instantaneously going out there and looking for deals. They’re putting a team together first, they’ve got their brand, they’ve their education done, they got money… They’re not going out there and asking brokers for $10 million deals and they can’t buy them.
And then once they have all that set in stone, we’ll go out there and start looking for deals. Once they get the other deals come in, they’ll have some sort of underwriting process to analyze them. We’ve talked about, on the show before, how you can vet a deal on their end. They’ve got a very detailed cash flow model that they’re inputting deals into, they’re going there in person, visiting the property. They’re pulling comps or talking to property media companies and brokers to figure out exactly how the deal operates, to the best of their knowledge so that they can create an offer price, submit their offer and then negotiate a purchase and sales agreement, which is what a PSA is.
Travis Watts: Yes, exactly. So hopefully everybody listening, you’re starting to see this is quite a job. And we’re only in pre-contract, out of the three phases. So the only thing I’d add to that section is back to the idea of finding passive investors… So what Theo pointed out is excellent, find another general partner that’s going to work with you, a business partner that maybe has a network, number one. If you don’t do that or don’t want to do that, you can always work with broker dealers, stay compliant, whatnot, and they can help raise capital legally for you, that kind of stuff. Just things to think about if you have no network. There’s even crowdfunding platforms, there’s different things you can do to get yourself in front of an audience. You’re going to pay for those things, but just don’t feel like you personally have to get out there and go raise $30 million on your own with no network, because you probably not going to do that.
So, Theo, I’ll let you take contract phase here, phase two.
Theo Hicks: Perfect. So now the deal is under contract. So when we say contract, the contract is that initial signing the contract to the closing contract; you’re signing the contract, the deal’s officially closed, you own the property now, right? So they’re going to perform due diligence on the deal. So when they’re underwriting, they did a high-level due diligence, but there’s certain things you can’t do until you’re under contract; so you can’t see every single unit, you can’t bring a bunch of inspectors into the property, and you can’t do certain types of reporting that needs to be done before you have the deal under contract… So this is when they’ll be able to do a lot more investigation to the property. And then at the same time, while they’re doing all this, they’ll create an investment summary and they’ll announce the deal to you, the passive investor, and then they’ll do some sort of conference call webinar to go into more details on the opportunity. We have here sending a recording to the investors, the best practice that GPs can do, because not every single person can make the one specific time call.
From the due diligence side, they’re also going to focus on creating those legal documents; the PPMs, subscription agreements that you, the passive investor, needs to sign. And then you need to create a lot of LLCs for the property. An LLC that owns a property, an LLC that you’re investing in, because technically, you’re investing in an entity, you’re not investing in the actual property.
They’ll look at the various bank accounts for the property, they’ll work with a lender to get the financing. So they’ve already talked to a mortgage broker or a lender, and they have an idea of what type of debt they can qualify for. This is just more of it being official; everyone has most likely gotten a mortgage before, so it’s essentially the exact same thing, but a little bit more in-depth. Some more reports are required, more financial documents are required from the borrowers. So that kind of covers the whole due diligence process.
So while they’re securing commitments from you, the passive investor, they’re doing all these other things to ensure that the property is still worth buying. Technically, they could back out based off of the contingency they have in the contract for some sort of environmental problem, or something was misrepresented, but there’s lots of reasons why they can back out. But as long as everything passes the sniff test, the due diligence and they have the capital from passive investors, they close on the deal.
Travis Watts: Awesome. A couple of quick little tidbits just from me as an LP. So when you announce a new deal to your investor list, make sure that email looks really good, first of all. Think about your headlines and your little taglines and your little hooks and stuff. And also, don’t just announce a deal with no call to action; don’t just say, “We have a new deal, here it is, here’s the overview.” Have links, subscribe now, precommit to it, or get on the list for the next deal even before you announce the deal, stuff like this to start getting and generating interest. Make sure people know it’s limited capacity, it’s first come first serve, blah, blah, blah, there’s a lot of interest in it, stuff like that.
But most importantly, just make it simple for people. Again, who’s your audience? Busy people. They’re checking their phone email real quick, “Oh, a new deal.” If there’s not an immediate “click here” to do something, it’s like, “I’ll look at that later,” and then they tend to delete it and they may never invest, they may just forget about it. So make it easy on people.
Same thing when you do your webinar or your conference call – don’t make people go through hoops to get the replay. I hate that. First, you have to opt into this, then we’ll send you an email with the recap later. It’s like, “No, no, just send the recap. Click here, and then it starts playing.” So just a couple of things to think about on the GP side. Just little pain points for me and things that I see a lot of people are not going to invest because of you have to click 20 buttons just to get somewhere with it. So that’s all I got.
Theo Hicks: Yes, make it very simple. And we kind of dig through—we do the Actively Passive Show, but I also do the Syndication School, where we talk about syndications, specializing in apartments, but the same concepts apply to all syndications on the active side. So I’ve gone over sample closing emails that have been sent in the past, and sample deal announcement emails. So you’ll be able to find those if you’re interested, at syndicationschool.com, find the episode and there’s a link to free documents in those episodes.
Theo Hicks: So post-closing. So the deal is closed on. I guess technically, this first one it should be done a little bit before closing and that’s creating the announcement email for the investors. A really good best practice is to really answer all the commonly thought of questions that passive investors are going to have about the next steps after the deal is closed. So when do I get paid? How much do I get paid? How do I get paid? When am I going to hear from you? What information am I going to get when I hear from you? Who’s my point person if I have any questions or want to change how I get paid? Things like that.
So a good best practice is to have the email that have a separate PDF guide that answers to frequently asked questions for that specific opportunity. And then you’ll put all this together in an email and blast it out to your investors the day of closing.
And then another best practice is that it will have their management company essentially in the parking lot while they’re going through the closing process. So once they send them the text or the call that the property is ours, they can go there immediately and start implementing the business plan, as opposed to waiting maybe a day, or if it’s a weekend, waiting until the next Monday to get started.
And then from there, they’re going to implement the business plan. This is where the asset management phase comes in. So I’m going to quickly go through some of the main responsibilities of the asset management. But as Travis says, it’s a full-time job, while you’re also looking for more deals and doing all the other things we’ve mentioned so far.
So creating the recap emails that are sent out to investors, sending out financials to investors, on an annual basis getting those K-1 tax documents prepared and sent out to investors on time, so they can file their taxes on time… Answering any incoming questions from investors, whether it’s via email or via phone call.
The main responsibility would be overseeing the property management company, right? So the management company is there every day, helping with the leasing, overseeing the construction crew if they’re doing some sort of renovations to the property… So making sure that they’re on top of the management company, that they’re on top of people that they’re responsible for. And then it’s usually accomplished through some sort of performance call with the property management company. Usually, every Monday morning there’s a weekly call, and they’ll go through the KPIs or key performance indicators of the property. Again, different GPs, they’re going to focus on different things, depending on what the asset is… But essentially just making sure that here’s what we assumed, here are our projections; are we hitting those, are we exceeding those or are we below those? If we’re exceeding those, let’s do more of that. If we’re below, we’ll then need to figure out what the problem is and then identify a solution and implement a solution, so we can let our investors know that we’re on top of this and not notifying them three months later that something went wrong.
We’ll also be frequently analyzing rents. Usually, this is done through software, but depending on the size of the deal, the type of the deal, you might do it manually, as well as analyzing the overall market conditions to determine when to sell. Obviously, they have a projected hold period when they first buy the property, but they don’t have to stick to that; they could sell early, they could sell exactly at that time or they could sell later. So they should be frequently looking at the market, looking at cap rates, the NOI, to see if they can exceed those projections to you, the passive investor, sooner, because money now is better than money later. They’ll make sure that you’re getting your distributions on time as well.
So those are the main Asset Management duties; there’s more that goes into it, but those have been the high-level main responsibilities. And then eventually, they will decide to sell the deal. So a sales process – you’ll have another syndicator or another investor doing the same thing that the sponsor you’re investing with did when they were in the contract to contract close. So this is just the other side of that. And so working with the buyer to close on the deal. Obviously, you’re going to market the deal first, find the buyer, go contract to close and then close. And then once you’re closed, ensuring that the proper distributions are sent out to the investors, and maybe the 1031, so they’ll have to identify a new deal within a certain time frame, but they’re responsible for overseeing the sale.
So that’s a lot, and as Travis said, it’s a full-time job. So while they’re overseeing the property, they’re also trying to get more deals, they’re also working on their brand, they also generate passive investor income, maybe they’re doing something else at the same time… So this is why we’ve kind of talked about when you’re vetting the GP, hopefully, they’re doing this full-time, this is full-time gig, and they’re not doing it part-time, they’re bringing on the right team members to help them with this process, because there’s a lot going on here.
Travis Watts: Exactly, 100%. You know, I think sometimes, Theo—and I’ve fallen prey to this, too… Sometimes you go to an event or a conference or you read a book and you get this lightbulb moment, this big epiphany, “Wow, I could be doing this, or that, and I can make so much money” and, you know, it’s just you get all ramped up and ready to go. But, you know, take a step back, really do your due diligence, right? I mean, do your research and understand how much really goes into this. This is not just a get rich, you know, kind of thing. You know, this is truly not only a full-time job; you have to be very good at doing this stuff. You have to be very competitive in this space. It’s a super competitive space, I don’t think that many people understand that. So play to your strengths is the biggest thing that I can advise anybody. For some, they’re awesome GPs; it’s like they were born to be a GP, and that’s awesome. They take care of their investors, they underpromise, they overdeliver, they can handle it, they do it the right way, as we’re describing.
For others, an LP route, it’s really just probably the best approach. Instead of being responsible for handling people’s money and making mistakes and getting sued and going down a whole other kind of path, the doomsday of being a GP, an LP route might make the most sense if you’re just after some passive income, tax advantages, participating in the real estate market, stuff like that. So we’re all different, I’m not telling anyone what to do. But just play to your strengths, that’s the bottom line.
And the only other thing I want to add to the last segment that you were on there is I’m a huge advocate for monthly everything; monthly reporting, monthly distributions, that’s always been my thing. But of course, I live on passive income, so I’m a little biased there. But even if you’re going to do quarterly distributions, let’s say, I would still do monthly updates; you’re going to save yourself a lot of time and effort.
People have questions. And as things happen over 3-4 months, people are going to be chiming in, they’re going to be calling you, they’re going to be emailing you, “What do you think about this Biden Administration, and 1031s?” And, “Hey, what about that tornado that came through Dallas, what’s the deal? Is the property okay?” So just keep people informed, be transparent. And if you can, if you’re willing to, if you have the infrastructure to, do monthly distributions and monthly reporting. That’s my take on it. Because even those that may not care about it, it’s certainly not going to be an anti-anything; they’re going to be okay with it. But you might lose some investors because they’re looking for monthly income and you only offer it quarterly. So just something to think about. Of course, you have to be doing stabilized assets and cash flow-focused investments, but… That’s all I got.
Theo Hicks: I really liked what you said about the new concept or ideas like, “Oh, this sounds great, I can be a GP and you know, make all this money.” Well, hopefully, today kind of shed some light on it’s not that simple, right? And some people really enjoy being a full-time GP, going through this process, and other people don’t enjoy that. So if it’s something that you don’t think you’re going to like, that there are other jobs out there, other ways to get involved in real estate, other ways to make money in real estate…
So I believe we talked about this on Actively Passive, we were talking about the shiny object syndrome versus the analysis-paralysis syndrome. So make sure you find that happy medium, make sure you’re never investing in a deal because the market is doesn’t meet every single criteria and then the GP doesn’t meet every single criteria, and the deal doesn’t meet everything criteria.
But similarly, don’t avoid investing because you keep getting distracted by the apartments and self-storage sounds great, but then mobile home is supposed to be really good, too. So kind of find that happy medium as well.
So if you don’t have anything else, Travis, that’s all I have. This is a sneak peek, a behind-the-curtains look at what it’s like to be an active syndicator, mostly focused on apartments. But again, a lot of these concepts will apply to other types of deals as well.
So thank you for tuning in. If you have any questions that you’d like us to answer on either the show or our 62nd question segment on YouTube, you can email me at theo@joefairless.com. And until next week, have a best ever day.
Travis Watts: Thanks, Theo. Thanks, everybody.
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