For today’s episode, we will be discussing how and why a key principal is crucial.
We will go over the principles of having general partner strengths with balance sheets.
We will talk about these things…and more in another episode of Multifamily Investing Made Simple in under 10 minutes.
Tweetable Quotes:
“the primary purpose of a KP is to provide balance sheet strength to the bank, to the lender on the deal if the other general partners can’t do that on their own” – Dan Kreuger
“they’re not usually the operators of the deal, but not always like the most active people,” – Anthony Vicino
“so the first part of that for me would be getting the cash flow machine going that I can then use to dump into the real estate” – Anthony Vicino
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What’s a Key Principal in Under 10 Minutes
Anthony Vicino: [00:00:14] ten-minuteHello and welcome to Multifamily Investing Made Simple, the podcast, it’s all about taking the complexity I would have real estate investing so that you can take action. Today I I’m your host, Anthony Ticino of Invictus Capital, joined by my partner, Dan Kruger. Mr. Kargman, then crusader.
Dan Kreuger: [00:00:33] Yeah. Now you’ve had better nicknames. I’ll take that one.
Anthony Vicino: [00:00:38] You know, in college, I feel like everybody is always like adding Sturr to the people’s name, like the ancestor dancer. I was trying to bring that back and be cool and hip, but I’ll take dance. I’ll take a dancer. He didn’t answer. So I’m here the day with the dancer on another ten minute episode. These are the ones where we try to break down a concept in under ten minutes. Keep it straightforward. Make it real simple because we’re simple guys. And today we’re going to be talking about a concept that we haven’t really spoken a lot about in the previous 100 ish episodes that we’ve done of this podcast. Humble Brag. They’re, by the way, we’ve been over 100 episodes in. Can you believe that
Dan Kreuger: [00:01:16] Kind of a big deal?
Anthony Vicino: [00:01:17] That’s kind of not saying we’re like they’re not great episodes, but the quantity definitely makes up for quality. And if you’re listening to this, I think you would agree. Now, the concept that we’re going to talk about today is the kepi, the key principle, also known as maybe a balance sheet partner. Who is this most enigmatic of characters? Dan Dancer.
Dan Kreuger: [00:01:41] I have no idea. OK, well, let’s go to two. Just kidding. We know what it is. So the key principle, what the heck is that key principle like Anthony mentioned is,
Anthony Vicino: [00:01:58] Say, Outteridge,
Dan Kreuger: [00:01:59] I was going to I was thinking of the word also. I was trying to say, Anthony, and it came out just awkward for everybody.
Anthony Vicino: [00:02:04] Ok, so I forgive you.
Dan Kreuger: [00:02:07] You don’t move on. So, yeah, like Anthony said, the key principle, the Capi, as it were, could also be known as a balance sheet partner. And that kind of starts to infer what this individual might be. And it typically is an individual or even an entity like a firm or a private equity group or something like that that comes on to a larger syndication deal for the primary purpose. They might have other roles or this might be just it. But the primary purpose of a copy is to provide balance sheet strength to the bank, to the lender on the deal if the other general partners can’t do that on their own. So a lot of people may not realize is that banks want to see significant financial strength in the general partners of syndication, meaning the guys that are running the deal. Just having the money in the bank for a deal is not going to be enough. They need to see several things from their borrowers to feel comfortable, even if you’re looking at nonrecourse agency debt. So from a, that’s what it
Anthony Vicino: [00:03:17] Is and it makes a bit of sense. And even if you’re a passive investor in syndication, you do want to see that your general partners have a certain balance sheet strength. The theory being if they’re on the hook for the loan and they have that liquidity, they have the means that if the project gets into trouble, they can go into their own coffers and keep it going like it’s good to see that. But when we’re talking about these really big, large, multi, multi, multimillion-dollar apartment complexes, you know, sometimes the general partners on their own don’t have either the strong enough balance sheet or the post-close liquidity, which is just enough cash in the bank that the bank wants to see. And a lot of times it’s equal to the size of the loan being taken out. So if you’re taking out a 10 million dollar loan, they might want to see, you know, a balance sheet that can support that because look, there’s close liquidity that can keep that project going if things get a little dicey. So when we talk about bringing in key principles, this is like a high net worth individual or an entity like you pointed out, they get a slice of the general partnership. It’s usually five to 10 percent of the general partnership. They’re not usually the operators of the deal, but not always like the most active people, sometimes they just are lending their balance sheet, signing on, taking the risk, and then just kind of sitting on the sidelines for the rest of the deal. Not doing very much.
Dan Kreuger: [00:04:37] Yeah, yeah. I think it’s important to note if you don’t see a key principle in the deal doesn’t necessarily mean anything positive or negative. I will say that we’ve never had an official key principle in any of our deals because we’ve served that purpose for ourselves. We’ve had the balance sheet to take down the deals that we’ve done in the past. However, if there’s a really great opportunity that’s substantially larger than we’ve done before, it’s usually good practice to start to introduce that individual. From the bank’s perspective, it hedges some of the risk-off for them and even for the other general partners. It provides another layer of security, just having another partner. In the deal to help support
Anthony Vicino: [00:05:16] It’s skin in the game, at the end of the day, it’s good to have more skin in there. So from an LP standpoint, that’s a good thing. It’s nice to know that you have a lot of skin on the other side of the GP that is really incentivized to perform and do well and not just let the deal tank and then ride off into the sunset and pretend like it never happened.
Dan Kreuger: [00:05:33] Yeah, exactly. And so for those of you who aren’t aware, if you’ve ever been looking through an offering memorandum and you see the general partner section about us, there’s something to that degree and you see someone with the term CP or key principle by their name, that’s pretty much the purpose that they they have in the deal for the most part.
Anthony Vicino: [00:05:50] That’s it. That’s the concept that we wanted to break down for you guys today. The copy, the balance sheet partner, it’s not super important in the grand scheme of things to the general limited partner, like a passive investor looking at deals, you’re not going to lose sleep one way or the other over this person. But it can be a key component of the general partnership. So the more you know, the more you know. I guess that’s how
Dan Kreuger: [00:06:13] There pun not intended.
Anthony Vicino: [00:06:15] I always intend my puns for that one. I did not. That was accidental.
Dan Kreuger: [00:06:19] That’s pretty good. Thank you.
Anthony Vicino: [00:06:21] Thank you. All right, guys. So that’s going to do it for us here at multifamily investing. Made simple. Hey, hey, hey, hey, hey. Before you turn this up, before you get off and go about your life, go leave a review. Yeah, I’m talking to you. Who you been talking to? Even if your name is Ben and you’re listening to this now, you’re going to feel extra compelled to go into review. So just know. We appreciate you, Ben, and see you next. And.
