Partnerships in Commercial Real Estate
This blog post is repurposed from an IG LIVE that Mahek hosted with AJ Osborne.
Partnerships in commercial real estate could be your new best friend.
One benefit of commercial real estate is that you look at it as a team sport because it takes a lot of capital, expertise, and a lot of people to help out, but it's not dependent on you. It's about putting a group together to solve a problem or go with a certain investing strategy.
When we look at the different kinds of partnerships, there are a wide variety of options.
The list includes limited liability, joint ventures (typically we see when two people go into business together), general partnerships with limited partners underneath, and more. When entering a partnership, forming them in a way that benefits you as well as your mission is key.
The most important part is being very clear about what roles you play, what liability each is taking on, what are the expectations set up within this structure, and who has the authority to make what changes.
Start with the failure because it will help you build it right. What happens when it goes bankrupt, when you want to leave, or when there's conflict on who's doing what? Having these serious conversations upfront can set the stage for a good partnership.
Incentives are really important, but they're most important when things fall apart.
When things go south, for example, you had a business deal where it turns out the other partner is incentivized for it to fail, so when times get rough they immediately go to the worst-case moves: sue or seize assets. This escalation occurs because there is no structure for conflict resolution. It can and it will happen, so the best bet is to be prepared for when it does.
When it comes to conflict, first-line mediation may be the solution.
The goal is to even out incentives for individuals so that they’re fair and equal, then conflict resolution is more about resolving than attacking. Creating an even playing field to resolve those conflicts is key. Mediation almost always just splits the bid. When faced with conflict, both parties are more inclined to work it out among themselves. But if you do have to turn to mediation, you have to talk to a mediator to unwind these things without everything crumbling. They just want it done. They typically will not care about who is right and who is wrong. We don't want incentives to escalate the situation, we want them to level it out.
In the past, AJ Osbourne has dealt with this. What’s the best way to prevent this from happening?
His answer: Defined terms upfront of what the exit looks like so that all parties know they can exit, it's written that this is how it works and this is what's going to happen. If it's open and vague, you start to have arguments of value, who did what, then you have people positioned. If it's set forth and clear everyone knows that if they want out, they can leave. It’s clearly stated that this is how we determine value, then we determine the means of extraction for the person exiting. Both things are just as important and if it's not clear upfront it will get messy. People always want out when it's not convenient so it's best to just be prepared.
When you're getting into a partnership, the things to look for are different for the different types of deals you're entering.
The best qualities in a business partnership are people that are not concerned with the small things, together for the long term, focused on the mission, not tripped up by little things, and aren't argumentative. Often it's people who bring different things to the table. If you both have different lanes and you're coming together to achieve an overall goal, things will most likely work out along the way.
When you enter into a partnership, you don't know what lies ahead. When you go into a contract, if you set parameters and one person is always coming back and trying to get an inch, that's a huge red flag. As partners, you need to be in agreement of the contract. You may both have things that will be important to you but there should always be a meeting in the middle.
Now just to clarify, being concerned with the small things does not mean detail-oriented people. That’s different, detail-oriented is a good thing! This simply means people that are too concerned with things like the items in the contract that force the other party to meet a parameter they're setting up.
Best quality recap: someone who is mission-driven and knows what their lane is.
For any new investors looking to find partnerships and establish your mission, remember to take your personal wants and desires into account. When selecting someone to be a partner in investing, your ideas need to be aligned. If you both want different things out of your investment, this is sure to cause some problems once you get to a critical point. You could potentially end up sinking your business.
