Structuring Real Estate Partnerships (Roles, Equity, Responsibilities) Pt. 2 | Investor Round Table

In this episode of the Investors Round Table, we explore the topic of structuring real estate partnerships for commercial real estate investors looking to scale their portfolios. We'll cover the importance of defining partner roles, distributing equity, aligning goals, and navigating legal and financial considerations. This episode will equip you with the knowledge and strategies needed to successfully structure and manage your real estate partnerships.

Get commercial real estate coaching, courses, and community to jumpstart your investment journey over at CRE Central: www.crecentral.com

Key Takeaways:

• It is important to align goals and ensure congruence in objectives and strategies with any potential partners before investing in a project together. Not being on the same page can lead to problems down the road.

• Properly assessing and managing risk is critical, including understanding different types of risks, likelihood of occurrence, potential impact, and having a clear risk management plan.

• Partnership agreements should thoroughly address potential issues like buyout provisions, processes for resolving disputes, and responsibilities in worst case scenarios to protect all parties.

• When evaluating deals, it is important to consider both the existing risk-adjusted cap rate as well as the potential for value add and equity creation through the execution of a business plan.

About Your Host:

Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.

Episode Transcript:

0:00

Are you looking to take the next step toward investing in commercial real estate but don't know where to go? Series central offers a comprehensive education and coaching platform designed to help you get started. Our online courses cover a wide range of topics from the fundamentals to advanced strategies, ensuring you have the knowledge and skills needed to thrive in this competitive industry. As a member, you'll gain access to our exclusive online community and monthly group coaching calls, providing you with valuable networking opportunities and personalized guidance from experienced professionals. Whether you're a beginner or looking to take your career to the next level, cre Central has the resources you need, visit www dot cre central.com. To learn more. Welcome back to the commercial real estate investor Podcast. Today we are diving into another episode, part two of structuring real estate partnerships. That is of utmost importance. If you haven't listened to part one, I highly recommend that you go back and listen to it because we talked a lot about distributing equity determining partnership roles. And today, we're going to kick it off with really aligning your goals between partners. Because if you are jumping into a partnership, and you're not having the premarital counseling conversations, you're gonna have a bad time, right? Because let's be honest, business partnerships are marriage without all the fun stuff. So you need to make sure that you know exactly who you're jumping into bed with and that you are going to be able to work together towards whatever you've got going on. So, you know, we'll get I'm going to kick it over to you first. I mean, when you're looking at JV or partnering with somebody on any of your investments, what are the you know, first few questions or items that you'd like to knock out with them to make sure that you're on the same page with what is to be done with this this deal? Yeah,

1:55

well, a partnership without aligned goals is like a ship. Without a rudder, it might float, but it's unlikely to reach its intended destination. So I like to try to start with ensuring congruence and objectives and strategies to try to get the fundamentals down so we can hit smooth sailing. Alright, now that I'm taking my sailor hat off, I want to say that that is complete at the theoretical level, but really difficult to be effective at the applied level. And what I mean by that is, yeah, you can have a lot of things that make sense on paper, but then you get into talking with a potential partner, and they might be really good salesman, or a saleswoman. And they may manipulate, not even knowingly, but subconsciously manipulate you into believing that you might need something that they have, and they want to get rewarded for it. So there's a couple of different, I think, buckets to be thinking about one who needs who more. Okay, that's a hard question. And you got to get real about those facts. Do you need this person more than they need you? Who found the opportunity? Right, because if you found the opportunity, the project, you likely are a little more engaged with it, and you want to see it to fruition? So make sure that you level set with yourself about should I continue to even even go after this project? Number three, risk, and I've got a whole section on risk. So we could talk about how I think about it here shortly. But who's putting their risk? Who's putting the risk up? Is that balanced between the two partners, you need to be thinking about this as like, if you're putting each other in a cage, because that's what you're doing here for three 510 years, who's got the keys to be able to unlock the cage and get out, right, and who's stuck in the cage. And you don't want to be stuck in that cage with no levers to pull and no keys to be able to get out behind that. So, you know, I think that understanding how to actually quantify that is the hard part. Now there is the legal paperwork and all of that, that you need to you need to have in place. But you know, thinking through the intangibles, and how to quantify the motivations of each person is really difficult to be able to actually do. So I think that you just similar into hiring right? They say that you should hire slow and fire fast. It's like how do you have tests with a partner before you go buy a $5 million project together? Hey, can you have you have you met with this partner outside of have an office setting outside of a coffee setting? Have you? Have you taken them to a project? Are they willing to actually get their hands dirty? What does their Rolodex of relationships actually look like? If they're going to be the operational partner? Do they have a track record of actually doing the thing that you're hoping that they're going to be able to do on this project? And if they're reluctant to one give you what else a track record or too reluctant to take on any risk, just know that when the going gets tough, they've got the keys to be able to walk out of that cage really, really quickly. And you're going to be stuck with that. So I'm not sure I directly answered your question. But I did give analogies about getting put in jail and sailing.

5:46

That's all that matters, man. We need more analogies like that in the show. I, you know, I don't drink anymore. But back when I did, I used to take partners out. And if they were potential partners, right, because I mean, if it's somebody I've partnered with before, chances are pretty good. We've been around each other quite a bit. But I would go out and see how they handle drinking for a couple hours. Right? Because that will tell you a whole lot about somebody. Yeah, you know, there's just something about alcohol, that lowers inhibitions, you either become a nice loving person, or you can become a total ass. And that has saved me a couple of times. And it's something that's that's worth noting, I don't know if that's the method that you want to use. But it worked for me. And there's that. I think we should definitely unpack risk more after we hear from that, because on the risk side, everybody thinks that owning 50% of a development project is sexy, until you realize there's $500,000 in pursuit costs, and you can't move forward with the project. Who's going to cover the losses of the of all that capital? Right? That's a big, big, big risk if you've never done it before. Matt, what about you, man?

7:00

Yeah, I guess I'm trying to go back I, I had to mark off all my analogies on my notes, because I've evolved in the entirety. I'm just messing. So I think the question was about alignment, mostly to start with, right.

7:12

Yeah, yeah. It was mostly about alignment, like, how do you make sure that you're in alignment with any potential partners on your investment goals for this project?

7:20

Yeah, I mean, so a lot of the good points were already covered, obviously, one thing that I, I guess I would really emphasize, maybe is, is, you know, alignment of character, and values and sophistication. So some of those maybe a little bit more intangible things, right? Because that's, that's something that becomes really important, because the reality of it is, as you can be in a bad partnership. And if things are going well, you're probably going to be okay for a while, right? Maybe you can ride the market and have an exit, for example, and everybody's happy. What, what you really need to be ready for is a bad situation, right? Having a good partnership in a bad situation. And you can't have one of those unless you have an alignment of values and character and sophistication. So that sort of goes to what you were talking about Tyler? And for me personally, I mean, just, I mean, I'm very hesitant to enter into a partnership for that reason, because it's really tough to know, if you, you know, you can figure out numbers, right, is there a lot alignment of risk, and do I think it's fair, that somebody has brought, you know, the right amount of money for the percentage of ownership, they have, for example, or, you know, these different ways of figuring out the math of whether you think the the alignment in the in the share of the partnership is fair, but when it comes to character integrity, how people are going to react when the deal goes south, or, you know, when we lose money, that's something that's really hard to know, without knowing someone on a deep level for a long time. So I'm really hesitant to enter into partnerships. And usually, if I've entered into a partnership, I've known the person for a really long time, and have a really good feeling for their values. Or I'm entering into a deal where the structure is such that the control is in a place where I'm okay with them having control or me having control. So that's sort of how I think about it. And in Yeah, I think, you know, one thing that happens a lot before we get into risk is, for some reason, people do not think about partnerships. As if they could lose money when obviously they can write, like when people come to me and they start partnerships. No one ever says, Hey, we're starting this partnership, and we're pretty sure we're gonna take a loss in a few years, but nobody really thinks about partnerships that way. They're all imagining, oh, we're gonna we're gonna kill it and we're gonna build this and do this and we're gonna sell it for this. And so a lot of alignment is you know, what are you referred to about exit, right, like keeping the end in mind. What are you going to do? What is the plan if your plan A doesn't work? What is your plan? envy, what is your plan? See? How do you handle a loss? Right? Like, what do you how do you handle if someone's going through a family situation and they need out? Right? So that's part of alignment, too, is really thinking through all of these things that could happen.

10:14

Yeah, I've got a, I've got a partnership here, you know, not not so long ago where, you know, we had to bring money to the closing table to sell it, right, because we were seller financing. And fortunately, we had a great operating agreement already in place. I didn't have to worry about it, because my other partner decided he didn't want to bring capital to the table. Well, that's totally fine. That's within his right. But it's clearly laid out in the operating agreement, how that will be handled. Which, you know, of course, I didn't think about my attorney put all that together. But now I'm thinking man, that was a great move. 344 years ago, we bought that property that he put all this stuff in there. Because now you know, I get to collect 100% of the cashflow, until that initial investment is paid back, which is exactly how it should be. It's a great way of doing it. And my partner's fine with it, because it's already written up and agreed to. It's one of those things that, you know, when you're first looking at partnering somebody, just sit down with them have the damn conversation. Are we going to hold this for five years? Do we want to do the burr method? Do we want to lease it up and flip it as quickly as possible and do a 1031 exchange together? Like go through those scenarios to figure it out? You'd be amazed at how many times somebody goes into it thinking we're gonna hold this forever, and I'm going to cashflow it and the other person's going, No, no, we're gonna sell it, I'm going to put the money in, you know, into my bank account by Ferrari, whatever it is, and that will create so much conflict. Logan, let's get back into into talking risk. So, you know, I kind of mentioned a story earlier, that was a little bit from an experience that I had with with another partner, where, you know, the as much potential upside as you can have, in these deals, you have that much potential downside. So, you know, when I was first getting into the business, I just always thought like, the most equity I can get, the better, right, like, I want to get as much equity in every deal that I do. And now I'm like, actually, I would like to bring in three other experienced partners, and I would prefer to not have the bag, you know, solely looking at my global cash flow. And I mean, how do you approach that on your deals?

12:22

Yeah, I mean, I think that risk is one of the most misunderstood aspects of a deal. And usually, I define it as anything that is unknown, or not a part of the plan. And a lot of times, you'll hear people say something that is high risk, right? Well, I think that's incorrect, because let's just game this out for a second, you know, a risk that has a high likelihood of occurrence. But a small impact may be completely acceptable. But on the other hand, a risk with a medium likelihood of occurrence, and a high impact may be completely unacceptable. And so just saying something is high risk, because you're you're investing in it, or you're thinking about it, the occurrence, you have to think about the impact of that as well. So I tried to kind of go back into Okay, well, what is a risk management plan, right, and that has some different parts to it, that's feasibility, time delay, one time, financial cost, recurring financial cost, quality, quality, right. And then you have to try to enumerate in figure out the potential risks and the occurrences for each one of those and the likelihood that it's going to happen, and then the impact that that might, might have. And so I think that's the the plan that I've tried to evaluate this now, I will say, you know, green getting in seven, eight years ago, I took some risks that had a massive impact, but a low occurrence of happening, and they happened. And I was really, you know, I was really strung out on a few of those opportunities. And so now it's like, well, what, what did I learn overdoing, you know, $500 million of real estate over the last couple of years, and, and, you know, what keeps popping up, you know, and I think that's, that's important. But if you don't know, the different types of risks, then you're just going in completely blind. And that's when stuff starts to catch you off guard, and you don't have a plan for it. And so, thankfully, you know, now you have the internet, we have, you know, chat GPT and all these things and you can you can really understand what the different types of risks are. You know, I mean, Howard Marks is probably one of the best investors in regards to thinking about risk and if you're interested in just learning more about how he thinks, runs Oaktree management, which is one of the most successful private debt, you know, investor funds in the history of investing. He writes a lot of these memos that you can go read and there are a couple on risk and, you know, trying to figure out if you're, you're going to be able to quantify it is is a losing game, but you need to be thinking about it. Ray Dalio says If you worry, you don't have to worry. If you don't worry, you need to worry. Right. And that's I think that's the right mentality. In regards to risk. Sam Zell said it best, I think, risk is the ultimate differentiator, I've always had a deep and complex relationship with and I'm not a reckless person. But taking risks is really the only way to consistently achieve above average returns in life, as well as in investments. But Sam knew what that impact of those risks were, how well he was in Ann Arbor, Michigan, or wherever he was, you know, property managing, you know, way back when and buying city blocks as a college student, right. I mean, he was in the know, of these different risks, and he invested for a very long time, and had a good relationship with risk. So you'll see reckless people out there that are just going and saying, Well, this is what I think is going to happen. When I hear this is what I think is going to happen. My red flags start to really just like, my antennae start to start to go up, because it's like, well, you're thinking that this is going to happen, what what, what actual data? Do you have to, you know, back up what you're thinking in this in this scenario. So I think that's important to keep in mind as well. And I mean, frankly, the best way that I've figured out how to quantify risk is, if you're working on a project, get it as in front of as many experienced investors and ask for advice as you possibly can. Because if you bring me a deal, you bring Matt a deal, you bring Tyler deal, guess what our, our first inclination is, let me tear this thing apart. Let me tear this thing apart and find why you shouldn't do this deal. And then I'm gonna put it on a, I'm gonna cherry code a little bit and send it back to you, right? I don't know why that's the way that it is, you know, you're not even asking them to be a part of the deal. But when you send it to an experienced investor, they want to find and poke holes in that. And you should use that as feedback to say, Man, I didn't really even think about that. Now is that risk, something that I can stomach or not? And that's the best way that I've learned how to kind of actually quantify risk and get other people's perspectives on things that I might not be thinking about. Well,

17:03

and we've also had to train ourselves to be that way over the years, right? I mean, you don't start off being a commercial real estate investor saying, let's tear apart every deal. You start off as a real estate investor, saying, everything is a deal. I want to do this. And, you know, it comes with experience that, you know, it's like realizing, oh, yeah, the stove is hot. I'm not gonna put my hand on it. You just start to realize like, yeah, actually, if I try and tear apart the deal, and look for every single reason that I shouldn't do this deal. And there aren't enough reasons. Maybe it is worth moving forward on. We've got Vic and saying, Hey, guys, Vic, and thanks for jumping in the live chat. Moxie saying the operating agreement is crucial in any partnership. could not agree more. Viken also said write the mission statement on a whiteboard. Just have your ideas actually physically thrown out there. Matt, you're an attorney. Maybe one day you'll be recovering attorney who knows. But what are your thoughts on structuring, you know, operating agreements for risk to protect the downside? Yeah,

18:11

I mean, so many gold nuggets already. On the risk side. I love the SAM Zell shout out. I love Sam Zell. And actually, he he really helped me formulate how I think about risk, which is, and I've got a poker background too. So I think about risk in a lot of weird ways. But I mean, I think what we're all shooting for is asymmetrical upside, right. Like that's what we want. And Sam Zell's, you know, one of his famous things he talks about is figure out what is the one or two things that could really go wrong in a deal, right? Like, what is the disaster scenario look like in a deal? And if you can figure that out, and you have a plan for that, and you can weather that, then and you've got a lot of upside? Now you've got a great deal. And it's it's similar in partnerships, in my opinion, right? Because everything is the other thing you have to think about is who's taking on what risk in a partnership. So just by entering into a partnership, in general, a lot of people don't realize in a general partnership, you have joint and several liability. So you're on the hook for almost anything that your partner does on behalf of the partnership. So if your limited partner, you know, if you're bringing capital in, you're trusting an operator, for example, you you are on the hook if that operator goes out and commits fraud, or does something grossly negligent, if somebody gets hurt if they don't have good insurance, right? I mean, there's so many ways, and you're taking on that risk. And you got to think about how the operating agreement and the partnerships are structured and who has what share of the risk, right? So if I'm, if I'm a partner, and I have a personal guarantee, I have tremendous risk. And if I don't, then maybe not so much, if I'm a very high net worth individual, that's partnering with a very low net worth individual who do you think's really taking on the risk there, right, the high net worth individuals taking on the risk. And so, just from a basic level, I think if you do not deeply understand the risk you're entering into the partnership and who has what share of that risk from a source other than your potential partner. You need to slow way, way down, right, you need to get an attorney, you need to speak with mentors. And, you know, the operating agreement and the partnership agreement. That's where we try to put everything in writing to account for all those worst case scenarios or even life, right. So there's a risk of someone dying in a deal, there's a risk of someone going broke or filing bankruptcy, or getting divorced or deciding, you know, you know, I mean, I literally had a partnership where the guy one of the guys literally went crazy, like what mentally unstable, and they had to figure that out. There's so many different things that can happen, right? Or we just don't see eye to eye anymore, something happened, and we just don't agree. So the partnership agreement is where you go ahead and you have a plan for all those things. Right. That's how you do what Sam Zell says. And you look for what are the worst case scenarios, and we've got a plan for it, we can get through it. Right. So some of the ways I think about it. I mean, we could get into specifics on what's important in an operating agreement, like a couple highlights, we talked about exits already. That's our exits are amazingly important in partnership agreement, or operating agreement, you know, buyout provisions, what happens with capital injections, what happens with losses, all that stuff, you really just want to sit down with a good attorney and get an education the first time you do an operating agreement or partnership agreement, and get all the questions answered. And out there in your first agreement.

21:37

Yeah, there's, there's so much that you want to make sure is covered in those overlays. And let's, I mean, let's go ahead and unpack some of that. Yeah, go for it.

21:46

I got a question. So have you either have you been through a situation where you're in a partnership, and one person, you don't see eye to eye anymore, or something changes in regards to where you're at in life? And you just want out of the deal? Right? Like, and we're talking maybe like a $10 million industrial building, like, and you have this partner and you've you've shared everything 5050 Up to this point. And you're like, Okay, I'm gonna buy this other person out. How the heck do you go around? And about figuring out what the value of that those those shares are? Is that in the operating agreement? Or how does that how does that work? Have you guys ever been through that?

22:32

Man, I literally went through this two weeks ago. Okay. Yeah, I just got a first deal. Yeah, yeah, let me go first, and then we'll hand it over to Matt, because I know that deals with stuff all the time. Fortunately, it was in the operating agreement. So we I was no longer seeing eye to eye with this partner, I was the one that was skewed on the high net worth balance sheet, taking most of the risk, right. And this was a newer investor that I had partnered with to, you know, I mean, he found a great deal. So I was like, let's do it. You know, by the way, if you're out there, and you're finding really great deals, give me a call him I partner with you on it. But But this big cautionary tale. He was no longer keeping me up to date on a week to week basis as to what was going on with the property anymore. And then I got twice this happened, where the bank reached out saying, hey, they're putting more debt on the property need you to sign this within the next 24 hours. And, you know, the first time, you know, I get it, whatever, I looked at it, okay, you know, called My partner figured out what it was about what it was for, and it was for, you know, like damage to something in the building from a storm or whatever it was, right. Like it was, it was something that needed to be done. happened a second time. And I called him and I said, Look, we don't have any plans to cashflow this property for two years. I'm not comfortable continually signing on debt without you updating me as to what's going on, and not having a plan to make our money back. So you know, I want you to talk to the bank, figure out a buyout. And, of course, the first words were, how much you want to be bought out for. I said, I'm not playing that game. It's in the operating agreement, it states exactly how we are supposed to be bought out it is the most recent appraisal value, we can go and get an appraisal value, it would have to be one that we agree upon, right? So you could always do two or three appraisals and pick the one that's right in the middle. Fortunately, we both agreed upon the appraised value minus the debt on the property times my percentage of the equity. So it was a very simple, straightforward deal, but it's not always like that. That is that's why it's so important to have a great way. Matt.

24:44

Yeah, no, it's super important because what will happen a lot of times as you know, like our firm will have what we call partition suits. I'm not sure if you guys are familiar with those, but that's where, you know, sometimes people will find themselves jointly owning property and They're at a standstill, right, like one side needs to sell. The other side is a lot of times unresponsive is what happens a lot of times where, you know, and that's a partnership, whether they have a written partnership agreement or not, it's still a partnership. It's partnership property. So, like you're saying, if you don't have anything in writing, you, you're stuck, right? Like there's not an easy, it's sort of like a divorce situation, you gotta go lawyer up and, and file paperwork with the court. And, you know, if you don't have an agreed exit, you've got to go through that process. You know, if you have a good operating agreement, there's almost an unlimited amount of ways that you can pre plan your exit. And you can put conditions on your partners, right. So typically, there's a few mechanisms built in, in your operating agreement. One is a fork forcible expulsion, right. So in other words, if, in most your operating agreements, if you you know, get nerdy and start reading them, you'll realize there's ways you can force partners out, if they filed for bankruptcy, if they commit certain crimes, or, you know, everyone can be different, right? If they commit fraud, or you know, they'll have different language. So there's a way you can force people out. But usually, you have to have pretty good solid evidence that they've done something significant. And then there's voluntary exit provisions, right, in the voluntary exit provisions, that's where you can get really creative. Or you can even have kind of like a third option, where not necessarily a voluntary exit, where anybody connects it wherever they want. But if one partner wants out, and the other person doesn't, right, like if one person wants to sell a property, and the other one wants to keep it, then you can create whatever sort of provision you want. In one example, that I've seen, encouraged sometimes is kind of like a discounted buyout rate, right. So like, that can be a good one. So if, for example, two people are going into a partnership to hold a property for 10 years, right, and something happens where one partner needs out early, and there's no foul play, then maybe, for example, you get the you get an appraisal, from an agreed upon praise appraiser. And the buying, the partner who's buying the other partner out, maybe pays them 80 cents on the dollar for their pro rata share, are 85 cents on the dollar or something like that. And I've seen as low as 75. And so that's, that's just like a little trick that I see some people use so that way. And then some people who, let's say, if you've got a high net worth individual or someone who's really taking on a lot of risk, they may have a provision in there where they can buy out the other partner at any time, whenever they want to, under set conditions, right. So maybe that's full appraisal value, or 95%, appraisal value or something like that. So there's, there's unlimited ways you can do it, I just think you should have a plan for the excess. And

27:42

I forget what this one's called. But this is an interesting one, I think I actually have this in one of my partnership agreements. But it's basically a standoff of sorts, whoever says I want to be bought out or you know, I want to buy you out of the agreement, they then have to make the first offer, the second party can then turn around and buy them out or sell their shares for that exact same amount. And if so, like, if I was trying to buy a partner out, and I offered them $1,000 for their shares, they could turn around and buy my shares for $1,000. Right? Yeah, that's super common. Yeah, you can't turn it like you can't turn it down. I mean, it's it is written in the operating agreement that your partner has the ability to buy you out for exactly what you offer them, because that's what you valued at. And it's great, because it keeps somebody from trying to undervalue the purchase of the other person's equity.

28:33

Yeah, so but in my opinion, it's just, it's really so much better if you have a plant pre planned, agreed way to do it, and how to value it to like exactly how to value is really important. Because it doesn't help you if if one partner is like, yeah, I want to be bought out and the other one's like, okay, cool. Give me a million dollars. And it's only worth 700. You're still you're still stuck, right?

28:55

Yeah, you got to find some way to force it. And Logan, I'm sure you see this all the time. It's like, I would rather see a 3040 50 page lease than a three page lease. You kind of want an operating agreement that is a little bit longer, more in depth, because it's going to cover more situations.

29:12

Yeah, absolutely. That makes a lot of sense. All right. Interesting. It's, uh, you know, I just wanted to see if, if you guys had had been through it personally, obviously, Matt, I figured you had been through a lot of those. But I think that's important for investors and folks that are putting deals to be thinking about. And, you know, you may get the same question from your LPs, you know, they may come in and say the same thing, and that needs to be lined out in your legal documents as well. You know, hey, I want to get I want to sell my shares. Well, what does that look like? It's not just with potential general partner partners.

29:45

Yeah, another good trick is, you know, if you find yourself in a situation maybe for example, like you've already got a partnership agreement, or you've already bought a property with somebody, option agreements can be really powerful tool, right? So like you get yourself early in a partnership or In a deal in, you realize that maybe you want a pre planned exit, that you hadn't thought ahead of time, you can create an option agreement where you have the right to buy the other partners shares out at a certain price. Or it could even be based on something in the future, right? Like, if you want to buy your business partner out, it's based on a multiple of EBIT da at that time, right? Or a minimum number, or whichever is greater, right. So option agreements can be a really great backup strategy to get an excellent business, you

30:29

can get really creative with it, too. I've got a business that I, I invested 50% of the capital, I've got another partner that invested 50% of the capital, and then we've got an operating partner. And we structured the operating partner, I mean, their equity contribution is their sweat equity, right? They are in there running this business day to day. So we structured it to where we could buy them out through their shares for oh, gosh, what was it, it was like the average value over the last 12 months based on EBITA. And so if the company is not profitable, and it's breaking even, then we can buy him out for $0. Now, it's not necessarily in our interests, right, we want to make sure that we've got somebody in there, that's, that's running the company day to day, but it also protects us on the downside, if this partner isn't performing, we don't have to worry about buying them out for 10% that they haven't heard. So there's a lot of a lot of little tricks like that, that you can drop in there. We could talk about operating agreements all damn day. We've got a question from Moxie, this came in, we were talking about buying assets earlier, what cap rates do you guys need to see in order to execute in order to buy something or partner with somebody? In my opinion, today, it's got to be an eight and a half to 9% cap rate with even better value add opportunity. I know that's aggressive. That's just how I look at properties. I'm typically looking at something that's mostly vacant, or you know, needs some significant turnaround, because there's, I make my money in commercial real estate by adding value. So it's tough for me to buy like a 7% cap rate with a five year lease. And but I said, Matt, what about you?

32:06

Yeah, I stopped paying attention around eight, probably. But you know, it's also one of those things where when I'm doing heavy Valley value add, I may not be paying a lot of attention to the existing cap rate, right? Because if I have a vision for the property and an exit, I'm really more looking at the equity spread, am I going to be able to refi? Well, I cashflow and hit the debt service coverage and all that. So, you know, that's kind of my answer. You know, if I was looking for something a little bit more stable, I'd probably start looking right now around eight. Otherwise, I'm more focusing on other elements.

32:36

Yeah, Logan? Yeah, man, I

32:38

got a deal sent to me yesterday from one of my banker buddies, and it's in receivership. It's a four, you know, four tenant retail shopping center in a great area. And they're like, hey, you know, we're, we're going to try to sell this thing. And I looked at the noi, I think it was somewhere around, I don't know, $200,000 in a why it was 66% occupied. So I looked at that and was like, yeah, it's a beautiful building and a fantastic area, but it's got a decent amount of vacancy. And the rental rates are already at 44 bucks a square foot, which seems very high, you have to go get really high rents. And this isn't a subdivision, or a sorry, you know, sub market of Kansas City. And I was like, Yeah, I'll take a swing at that at a at a 10 cap, you know, so I was like, I'll offer him to 2 million bucks, you know, and maker text me back. And he's like, Well, you know, we've even you know, just to get this off of our books, we can't sign off of it. Unless it's a it's around $3.5 million. And I was like, you're trying to sell a 66% occupied building that's in receivership for 5.7. Cap? And he's like, yep. And I'm like, that is just not. Right. I mean, it's just not going to happen. So I think that positive leverage is something you should think about Moxie in regards to if you're buying an existing asset that has cash flow on it. But if you're in regards to, you know, buying a redevelopment or something that's highly vacant, what is a cap rate? What does that even mean? You know, I mean, if there's one space out of five that are occupied, and the NOI is $25,000, like, you're gonna, you're just gonna buy that at a at a 10. Cap, like, maybe I guess, if you're really good at get a really good deal. Because you're going to build that to a 20 cap, which is phenomenal. And maybe we start seeing those real estate deals at some point. And that's the type of deals that you're doing. But you've got to be able to look at a pro forma and say, Okay, well for that other space, you know, I've got to retrofit it, and I've got to put some ti into it. And so, I'm gonna, I'm gonna underwrite, you know, rental rates at $30 per square foot. What does that look like if I can actually make that happen? So again, that's, that's one of those pieces of risk that we were talking about, right? Like, that is a big risk going in thinking that you can go get $44 per square foot, it's already built out as a restaurant. So you have to go get a restaurant tenant or retrofit that whole space, and they have to be able to support $44 a square foot. That's a pretty big risk. If you're gonna go buy it at a 5.7 cap and You buy that a tin cap? You got some room there. So anyway, so that's just kind of a quick rundown of a project that I was I was thinking about yesterday. Yeah.

35:08

And I think great way to bring it around too, because you have to you have to put risk into the formula when you're talking about what kind of cap rate you want to use. Right? So it's really hard to, you know, you got to think about the asset class and then the risk of the project, right, that's associated with the upside. So it's really not a, it's not good to have only a blanket answer for that.

35:29

Yeah, I mean, you got to there's a story to be told with every property, right. I mean, the last, the last acquisition I made was $5.6 million. It scared a lot of people away, it had potential environmental issues. We figured it all out, I knew it was gonna appraise for over 10 million. So I was like, you know, what I'm willing to put the work in, because I know it's going to appraise for significantly more it appraised, like literally, you know, $100 under 12 million. So it's like, yeah, that's that's kind of worth spending some time on. So that's all we have for today for this investors roundtable. Appreciate you all for joining us this week. We will see y'all next time and part three of structuring real estate partnerships. Thank you all for joining us. Are you looking to take the next step toward investing in commercial real estate but don't know where to go? Series central offers a comprehensive education and coaching platform designed to help you get started. Our online courses cover a wide range of topics from the fundamentals to advanced strategies, ensuring you have the knowledge and skills needed to thrive in this competitive industry. As a member, you'll gain access to our exclusive online community and monthly group coaching calls, providing you with valuable networking opportunities and personalized guidance from experienced professionals. Whether you're a beginner or looking to take your career to the next level. Cre Central has the resources you need. Visit www dot cre central.com To learn more