The need for a Co-GP in Real Estate (Co-General Partner)

Tweet: https://twitter.com/ArtemTepler/status/1651463699117531137?s=20

In real estate, to keep growing fast, you'll need a Co-GP, or you'll run out of money with the traditional 90/10 co-investment model.

In each round of tech investments, founders aren't expected to keep putting money into their own deals the bigger they grow.

Whereas, in RE, the traditional 90/10 model will leave a real estate operator very cash-poor since typically the 10% is more than the fees that the deals pay, and the overhead with salaries still needs to get paid.

Running out of cash is one of the biggest risks to a business. Your options are to go slowly and take deals full cycle, or get a Co-GP and go big fast.

Getting a Co-GP can provide the necessary funds to grow quickly, but it also means sharing control and profits with another party.

Ultimately, deciding between the two options depends on the operator's goals and risk tolerance.

I have friends that are happy doing smaller deals with all debt and no LPs and have a great life.

Tweet: https://twitter.com/ArtemTepler/status/1629834783801917442?s=20

Below is my interpretation of what an ideal CoGP would look like:

IMO this is the IDEAL:

- 90/10 co-investment with your CoGP from day one

- 90/10 cost-overruns with CoGP - 50/50 on the promote

- CoGP provides track record, LP relationships, and experience/advice

- CoGP allows the GP to keep the majority of the fees to build the GP business

- CoGP has a balance sheet and provides loan guarantees

- If passing on the deal, CoGP gives quick 10 business day "NO" and doesn't burn the whole escrow period, and GP can go look for another CoGP (no exclusivity, 1st look only)

- If signing on a loan and providing most of the GP capital, CoGP should and will have major decisions.

- Partnership should be for a limited duration, 2-4 years to see how you two get along.

There must be a reasonable end date to renegotiate so that you don't get stuck having to show deals to someone you might not be that into for the rest of your career.

Like in the marriage market, compromises on some of these terms will be necessary.

The question is: how much compromise is needed? That depends on your market value, whether perceived or real.

You don't want to get stuck in a business marriage you'd rather not be in, and you don't want to get stuck having to pay business alimony to someone for the rest of your professional life.