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Launching Real Estate Syndications – Orbit – Asset Management

Launching Real Estate Syndications – Orbit – Asset Management

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Launching Real Estate Syndications – Orbit – Asset Management

Asset management is a funny thing. What does an asset manager do? It’s obvious what a property manager does, right? They manage the property. So what’s different about managing an asset? Let’s talk about what it takes to be a good asset manager. 

Being a Fiduciary

First and foremost, to be a syndicator – which is an asset manager – you are a good fiduciary. This is an incredibly important role. This is where you earn the trust of your investors because you are a trustworthy fiduciary. You will never have a long career in this business if you do not act as a fiduciary. The number one rule here is that you always act with loyalty, prudence, and care. 

That means that for everything that you’re doing with this investment, you view the asset as someone else’s and you take care of it accordingly. You’re mindful, you’re diligent, and you’re a steward for the asset itself. You favor the investor over yourself when you have an opportunity. You still take the fees you set out upfront, but you take good care of this asset for the investor. 

Fair Dealings

The second way to be an excellent asset manager is through fair dealing, meaning that you treat your investors equally. Now, this doesn’t mean that you treat them literally equally, that you can’t do anything without everyone being on a conference call. But if there’s an opportunity to vote or something like that, you give every single investor their proper weight. 

Treat your investor who came in for $5,000 the same way you treat your investor who came in for a million dollars. Treat them both like the most important investor in your deal. This doesn’t mean you have to call the $5,000 investor first when something comes up. You can certainly call people in the order that you find appropriate based on how much money they put in, or who you like the most! But you always give everybody the same amount of information and the same ability to have input into whatever you’re talking about. 

Disclosing conflicts is a very important part of fair dealings in asset management. If a conflict arises, it’s important to disclose that conflict as soon as it’s identified. And then really think about whether it’s a conflict that you want to keep, whether that is a conflict that you shouldn’t just give up so you’re not favoring the investor. You should have disclosed it from the very beginning before they got into the investment. 

Confidentiality

The most important duty of a fiduciary, after loyalty, prudence, and care, is confidentiality. Investors should never have anything about them known to anyone outside of the syndicator. If somebody gives you their trust and is investing their money with you, it’s not for you to share details about who else is investing with you. 

Value-Add

Being a fiduciary is one of the lenses that you need to look at your role of being a syndicator or an asset manager through. The next lens that is important to look at it through is the piece of adding value

What you’re trying to do is to maximize every penny that you can now you put together a good business plan for these people. It’s always about striving to see how much you can get that property to produce in terms of income for your investors. 

Let’s start with what we mean by value. As you know, value equals NOI over cap rate. If you’re aiming for massive, massive value in terms of the NOI, you’re actually talking primarily about cash flow. You want that cash flow number to be as big as possible. 

And when you’re talking about cap rate, what you’re really talking about is where your property sits for like properties, which we’re calling appreciation and positioning. 

So the higher I make your NOI, the bigger your value is going to be and the lower your cap rate. And you want to drive it down so that your cap rate is very, very small. If you took an apartment building that was rundown and therefore had a six and a half cap, but you pumped in value and made it the hottest place in town, you’d be getting below a four cap for that building. And that would equal massive, massive value. 

How do we pump up the cash flow? What we want to do is we want to drive up income and drive down expenses. The more income, the more cash flow. The less expenses, the more cash flow. 

So how can we deal with more income? When we look at square footage of the building, that’s the basis for how you’re getting rents. A lot of times that is part of your income as well. The income is based on so many dollars per square foot. So what if you have more square feet? Now you can either do that by just adding on, but one way that’s been very successful in the past is by re-measuring the building. The main body that comes up with advice on how to measure a building is called BOMA, the Building Owners and Managers Association. 

Over time, because it’s run by owners and managers, BOMA has come up with ways to increase the volume of floor space based on how we measure the building. So what starts out as a 10,000 square foot building might end up being over a 12,000 square foot building. That adds a huge amount of value, right? That’s 20% more money right there. 20% is a lot of cash, all income and not expenses. It just adds complete value. 

The other way is to add tenants. How do you add tenants to an existing building? Well, think about cell towers. Can you get a cell tower on that building? Can you get a billboard? What about vending? Those are all different ways for you to make other income as well. Then there are services that you can add, like phone service or data service to tenants. By making that available to them at a decreased rate, they can sell it back to their customers at full rate. 

What about signage? The signs that you see the monument signs on retail centers, oftentimes there’s not there’s no charge for it. But there could be, and your tenants may be willing to pay for special placement in that signage. If it’s not in their lease, it could become part of their lease and that it’s up to them whether or not they want to appear on that sign. Charging for parking is also another way that can take place. It all has to be done under the guise of the lease, so just make sure that you are complying with the lease itself. Lastly, just look at what that rent of value is. How can you make the space more desirable so you can charge more rent for it? This is what happens when you flip a unit in an apartment building right by redoing the kitchens or the bathrooms. You’re making it more desirable so you can get more rent. 

On the expense side, there are things you can do too. One thing that works very well is solar power, not only lowering the operating costs, but taking advantage of tax credits associated with that. Next is security. Are there ways to lower your security costs? What would happen if you had a security system with cameras that was monitored remotely rather than somebody appearing coming on site all the time? What about submetering? If you are getting all the meters for your tenants, you’ll have a lot of extra work to go through in order to make sure your tenants pay their proper amount of utilities. And you probably are eating some of these costs. Submetering can take care of that problem for you, so the expense is now completely on the tenant. There is also the issue of property tax appeals. So if you think that you can save money on the property taxes, then so much the better. 

You may be looking at this list and thinking to yourself, I do retail, and we have all triple net leases, so none of this matters. Well, that’s not true. The more you lower your expenses for your tenants in that case, the more money that they have available to pay your rent. Tenants look at the numbers that they’re writing on the check as the money that they’re spending; they’re not looking at it as their rent amount. The more you drive down those expenses, the more that monthly check is going to you, rather than to those expenses. 

That’s how we affect the NOI portion of things. But the huge leverage is also the capital expenses. So how on earth do we drive down cap rates? Cap rates are really how the property itself is positioned in the market. Look at things like tenant mix, architecture, ingress and egress going? As you redesign the ingress and egress and the parking lot, you may find extra parking spaces, which you can also charge for. And then marketing. Now you’re probably not going to market a strip center. But you probably could market a fairly good sized office building. If you make your office building prominent, give it a name that’s cool, and make it something that wows people, you’re going to start drawing more professionals that want to put their office there and are willing to pay more rent. This also adjusts how it’s positioned in the market. So it becomes more of a pride of ownership and people are willing to pay a lower cap rate for that building when it’s time to sell.

Tilden Moschetti, Esq.

Tilden Moschetti, Esq.

Tilden is a Regulation D syndication attorney specializing in 506b and 506c private placement memorandums and offerings. He is a syndicator himself and General Counsel to 2 private equity firms.

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At Moschetti Law Group, our practice serves the needs of Founders by providing syndication attorney services to Founders. Whether you are the Founder of a real estate empire or building a business and need assistance with forming your syndication, understanding crowdfunding, private placement memorandums, and operating agreements.

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