July 25, 2011
How Much is My Guarantee Worth?
Question from a Reader:
I’m signing a note for 60% of the purchase price of an apartment building and I am putting together the syndication. How much is my guarantee worth?
It's hard to know what the right amount of participation is for the person who is responsible for putting the deal together – or for someone else who assumes responsibility for the debt. It’s a function of how well you sell the value that you add. In the case that you have described, as much as I recognize how you feel that you are the cornerstone of the deal, an investor will give you very little credit for signing the mortgage and assuming that responsibility. You indicated that only 60% of the deal has been guaranteed and that 40% more remains. Remember, the last dollar, like the last yard in a football game, is the most important dollar. That’s because it's the one that's worth the most, whereas the first dollars are worth the least.
There are two ways to think about the participation for a promoter. The first is the venture capital model, which assumes the promoter or inventor brings value to the transaction. For example, the inventor may contribute intellectual capital of some type. This investment makes it possible to monetize the patents or marketing plans. Alternatively, the real estate model is used when the additional value is forced into the asset, either through appreciation, management adjustments, or other factors.
The model to use depends on what should happen on liquidation. In a venture capital environment, on liquidation, there's probably not much to liquidate because in many cases, the intellectual property of a failed venture is close to zero. In real estate however, there's intrinsic value, regardless of whether or not the promoter adds any additional value. That's the reason that promoters don’t take a substantial percentage of the current value of the transaction. Instead, they take a substantial percentage of the upside that they help to create. Most promoters take real estate fees as they are earned and success fees based on the upside generated in the future of the property.
Signing the note is not worth all that much and the investors might expect you to do this anyway. Remember too that on liquidation, your note will not be the first money to go down the drain. On liquidation, the equity is going to go first and a personal guarantee on 60% debt is not likely to be attacked if you're buying the property right. We sometimes structure in a “Guarantee Fee” for a few points a year, but it doesn’t really affect our back end percentage.
If you have an opinion or thought on this topic, please write a comment in the form below. Share this blog with your friends. Thank you for being one of our loyal readers. We appreciate you and are rooting for your success.
Often dubbed a "Growth Architect" by his clients, Joel Block advises companies on explosive growth strategies by driving revenues and sales. Well known in the capital markets, Joel is a successful entrepreneur, speaker, advisor and is an astute investor. Joel is CEO of Bullseye Capital , a full-service real estate company supporting owners and buyers of real estate assets with brokerage, leasing, property management, and mortgage services. Joel is also the founder of the Bullseye Capital Real Property Opportunity Fund, LLC which is an investment company that acquires distressed real estate by working with accredited investors.
A leader in real estate syndication, we offer seminars to assist others in acquiring the skills needed to raise syndicate capital to acquire properties. Imagine knowing how to pool funds to purchase any real estate investment, whether single family, multi-family, commercial, or anything else. For more information and complete details, please go to http://www.syndicatefast.com/.
Go Out And Stake Your Claim!
P.S. To discover how to gain capital to grow your real estate business exponentially
please click here ==> Harnessing the Power of Syndication