Feb 26, 2022
How to scale up to institutional joint venture equity?
General partnerships. Limited partnerships. Joint ventures. New investors and business owners will encounter these business entities at some point in their lives before they even think about the possibility of scaling up. The important thing is for them to understand what they really are and what fits their businesses the best.
Here to unwrap these topics to us is Jake Clopton, President of Clopton Capital that structures commercial real estate financing, specializing in the $1 to 50+ million debt and equity space. Jake was an interbank hedging products trader before he jumped into real estate.
[00:01 - 03:41] Opening Segment
- What happened in 2009 that promoted Jake Clopton to change careers?
- Jake didn’t have a background in real estate business
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- Here’s what he did to learn
[03:42 - 18:25] Structuring Joint Ventures
- How to bring together lenders and borrowers in real estate
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- Jake gives a sneak peek of their approach
- Real estate syndications vs. joint ventures
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- What’s the difference?
- The fees that are common in a joint venture that investors should know
- Jake shares a few industry practices about joint ventures that you don’t want to miss!
[18:26 - 19:27] Closing Segment
- Reach out to Jake
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- See links below
- Final words
Tweetable Quotes
“I didn't have a background in the [real estate] business really. Candidly, I just started making phone calls and calling people and calling banks and trying to find lenders.” - Jake Clopton
“Once you hit that critical mass of screwing up so many times, you start to do things right.” - Jake Clopton
“When I put together like a package to send to one of our [joint venture] guys, I really want to focus on who is the sponsor.” - Jake Clopton
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Email jclopton@cloptoncapital.com to connect with Jake or follow him on LinkedIn. Are you looking for a commercial mortgage broker? Visit Clopton Capital now!
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I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.
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Email me → sam@brickeninvestmentgroup.com
Want to read the full show notes of the episode? Check it out below:
Jake Clopton 00:00
I really want to focus on who’s the sponsor. What's their track record, you know how many deals they entered an exit? And did those deals work out the way that they modeled them? Right? And that's the biggest thing like, you know, you're putting together a pro forma, how did it work out? Right? I mean, things don't always work out exactly. Like you say, you're pro horror. But that's the biggest deal, right? What was the execution of these deals? And did it work out kind of the way we're pitching as an investment to somebody else?
Intro 00:25
Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we will teach you how to scale your real estate investing business into something big.
Sam Wilson 00:37
Jake Clopton is the president of Clopton capital, they are a nationwide commercial real estate finance company. They arrange debt and JV equity for all commercial real estate asset types. Jake, welcome to the show.
Jake Clopton 00:48
Thanks so much for having me on
Sam Wilson 00:49
Pleasure’s mine. Same three questions asked every guest who comes on the show. In 90 seconds or less, can you tell me where did you start? Where are you now? And how did you get there?
Jake Clopton 00:56
Okay, got it. So before I started this company, I traded interbank hedging futures, like three-month LIBOR futures and fed funds and stuff, and I quit doing that around the 2009 era, laid out three hours what happened, then interest rates went to zero. And, you know, if you trade things, I need to move around. And this was happening anymore. So at the time, right, there was, you know, a huge crunch to find business capital. So my idea was to move into finding a way to insert myself, you know, into the mix of being able to find capital for people, right. And so we did right here. We're an intermediary, we connect sponsors with capital sources. Right. And I didn't have a background in the business really. Candidly, I just started making phone calls and calling people and calling banks and trying to find lenders, and then putting it out there that what we were doing, and it, 14 years later, man, I mean, that's, you know, it's working out pretty well.
Sam Wilson 01:50
That's really intriguing. I want to hear more about that, like, you know, you start calling banks randomly. I mean, there's got to be more to it than just throwing mud against the wall and seeing what sticks.
Jake Clopton 01:59
No, yeah, certainly. I mean, you know, whenever you started something new, right? I mean, I didn't know, and maybe, I guess I'd say all the lingo and you know, exactly, you know, who to get through to, but one thing I'm pretty good at is cold calling people, I have absolutely no problem with it. I mean, I'll stalk them down, like I'm their ex-girlfriend. So I just really just started, you know, calling banks and lenders and networking. And honestly, it was really the networking, right, like asking people to, you know, connect me with people and like, hitting up social media in researching people in and really, you know, after, you know, you kind of envelope yourself, and then making your life for a couple of years, you know, it catches on pretty quick. We made a lot of mistakes, right? Just, you know, this, how do business starts, right? And once you hit that critical mass of screwing up so many times you start to do things right. So…
Sam Wilson 02:47
Yeah, that's intriguing. So the whole, you saw in the market, of course, was that there was no money available. And then you saw that there were people that needed money. And you said…
Jake Clopton 02:54
It was a financial crisis, right. I mean, that was the difference between 2009 and 2020. Right. 2009 was a financial crisis, right? There are bank balance sheets, right? There's no lending. That was the issue, 2020, that markets were healthy the entire time, there was lending available. And that was never the problem. And that's one of the reasons why you've seen such an enormously fast recovery, right? I mean, there was all these social programs and stimulus as well. Right. But I mean, the fact that the capital markets were healthy the entire time. I mean, that really is what springboard it for.
Sam Wilson 03:25
Right? Yeah, absolutely. That's really, really intriguing. So I mean, out of the gate, you had to have at least a handful of people saying, hey, I need money. And then you had to have at least a handful of people saying, hey, I need to lend money. How did you put those two together? And then how do you guys make money on that different, putting those two together?
Jake Clopton 03:42
Right. I mean, so, you know, I mean, what we do today is, you know, I've reached out to people that, you know, we think would be good sponsors to work with, right. So people that are in doing real estate deals, you know, syndicators, or private investors or small middle-market real estate companies, right. So we finance in like, the small middle-market space, which kind of says, like, one to 100 million, although with inflation, I feel like no markets getting higher than that. Right? So, you know, we actively go out and talk to people, and now we're gonna be I'm gonna do this for 14 years now. So I mean, at this point, people are just kind of finding us in different ways, right? And then, you know, the same thing for the capital market side, right. I wouldn't say every intermediary or broker out there has the same relationships in the capital markets. I mean, candidly, I think, you know, certain guys get great relationships with, you know, lenders, and they're able, maybe we'll do things that other guys aren't because of that relation. I mean, at the end of the day, on both sides, it's really still people making decisions. And if you've got a great relationship with one side that you can kind of push a deal through or knows like, Hey, this is really something you guys do look at, I think this would be a good deal to finance you know, I mean, that definitely, you know, carries weight.
Sam Wilson 04:50
Yeah, that's really, really intriguing. Now, what you guys are doing is different. You know, what we typically talk about or see a lot in the market right now is you know, a GP, LP structure. Were you know, I'll be the general partner, and then we'll bring in a bunch of private investors, you know, maybe 20. And investors, they'll put their money in there, the limited partners in the deal, you guys are doing something entirely different than that in by calling it JV, Limited Partnership money, is that mean? You guys are bringing all of the money doesn't mean you're bringing 90% of it? What's that mean? And then how are those deals structured?
Jake Clopton 05:19
Yeah, so the real difference is, one is a real estate security that's highly regulated, and one is not right. And the one that's highly regulated is the passive investors that don't really have a say, in what's going on. Right? So joint venture partners, right? I mean, the first thing that's gonna stick out to you is there's gonna be a joint venture agreement, right, they have controls, you know, they can make decisions, they can force a sale, stuff like that, you know, just because of the limited partner doesn't necessarily mean it's going in a direction. But it's more about the actual joint venture aspect of it. If you're doing passive investing, you know, that's a real estate security. And, you know, you've got a lot of rules that you need to adhere to right, typically go either broker deal, or doing PPM and stuff like that. So as soon as you see certain things like a PPM, right, the offering, you know, stuff like that, you immediately know, right, it's a security type deal. And candidly, that's where I see some sponsors kind of, you know, get themselves in, or possibly in the future, a little bit of like heat, because if you're structuring stuff as passive investments, and you know, you're not structuring it the right way, and going through the right channels instruction, real estate security, if something happens, you know, you might end up getting a phone call about that later on the future. Right. So something to keep in mind for sponsors that are raising equity like that.
Sam Wilson 06:35
Oh, for sure. Lots and lots of landmines. Tell me about the structure. I mean, one of the things you just pointed out, one of the interesting nuances, is that you guys have a controlling interest in the deal. So what are some other kind of differences between, you know, the ordinary syndication model, and then the JV limited partner model?
Jake Clopton 06:52
Yeah. So if you're doing like a syndication, right, so what are your, you know, the people watching that, listen to the show, watch the show, is investing with a syndicator, they're most likely, right? One of I don't know, depends on how many how big the raises, but maybe one of 50 people or something like that 50,000 bucks a pop, right? In a JV scenario, typically, that will raise there's really one investor and I think on both sides and the GP LP, you typically do a 9010, right, 90% of the equity is the LP partner, and then 10% is going to be the GP, but the biggest, you know, different squatter structure is syndicators got all these smaller individuals, you know, that are just investing capital and they don't have really a say they're just along for the ride whereas with JV, you know, you've got one investor primarily maybe could be, you know, a fund or maybe like a family office or something like that, they typically want to be the single LP investor, I mean, even as getting as high as like 20, 30 40 million bucks, you know, as an equity check. And then, you know, that's gonna be the biggest difference. And then they are gonna have controls, for instance, most of the JV deals we do are shorter term in nature, like value ads, or construction in a three to five-year timeline. Right, right. So if they can't recycle their capital, kind of in that timeline, they could potentially force a sale and stuff like that. I mean, as an investor in a syndication, again, years along for the ride, you can't do that. Unless you the only way you're getting out ahead of times, if you sell your position to somebody else, and I'm guessing you're doing it at a loss if you do that.
Sam Wilson 08:19
Right. Yeah, that's, uh, you bring up a good point there. Yeah, that you could sell your position. Maybe it's not even at a loss, but it certainly is a hassle. And yeah, oh, for sure. And you know, I'm gonna take a left turn here, since we're talking about it. I think it's interesting, the idea of blockchain real estate coming, which will bring some potential liquidity to that. I don't know if you've studied that at all. But the ability to sub out investors quickly and easily is, I think, on the horizon.
Jake Clopton 08:41
Yeah. I mean, I think it's got a long way to go. I mean, you could do it today, right? And the whole, like, value proposition of it is that there would be this liquid market with a bid and an ask, right, right, where if you're like, hey, gotta get out. Let's go to the market, we'll hit the bids, you know, and then we'll sell.
Sam Wilson 08:59
And that assumes anybody knows anything about you know, if I'm putting a deal together, and you put it out in the open market, no one's gonna know who Bricken Investment Group is really sorry. But I mean, the vast majority of United States, like who's that and what do they do again? Like, you know, we have less than 100 investors. Okay, that's really nobody. So yeah, that's really intriguing. Sorry, to go down that rabbit hole. But I just thought it was an interesting point you made there. Talk to me about, so you guys bring 90% of the deal. I mean, what's your percentage of ownership in it?
Jake Clopton 09:26
You know, so every deal is a little different. Right? So I mean, it's really a joint venture as far as ownership. So um, you know, the way we model it more is based on like, what the returns of the LP investors are, right, ultimately, that they're looking for. And typically, you know, what the returns they're going to get are somewhere, you know, it, well, depends on the deal. But I say the average is high teens, and then like a 201, equity, multiple, you know, minimum. So that's really what these guys are going to be looking for the most part. I mean, the returns, in general, are heavily weighted towards the general partners, but you know, I mean, it's different for every deal and you partners, you know, depending on what they're bringing to the table, you know, command more ability more leverage, right to get a better return. Like for instance, now let's say I bring a general partner to the table, they find a deal on LoopNet and they're using a third-party management company as a property in Texas and the guys in I don't know, New York or something, right? That's, you know, maybe a DLT guy doesn't have his nor module enormous amount of leveraging, right? I mean, basically, all third party-managed finding a group that is out there, the LP probably saw the deal. Right, right. The big difference between a guy, you know, an operation that's vertically integrated, meaning, you know, they went out, they originated the opportunity themselves, that's the only way somebody has access to it. Right, Those are, really, on the market, they're all they also do their own management, you know, they're all in contracting work and everything like that. I mean, that's a deal that those guys are going to have a lot more leverage to get better return for themselves versus, you know, before.
Sam Wilson 10:54
Yeah, absolutely. So, you know, it's a joint venture deal. When it comes to fees and things like that. I mean, again, going back to the GP, typical GP, LP structure, and just kind of doing a cross-comparison of these two, you know, one of the ways that sponsors get paid is obviously on acquisition fees. For us, that's all we charge an acquisition fee, and we're done. There's never a fee, again, on the dealer, maybe an asset management fee, you guys cut those out and say, okay, look, we're bringing 90% of the capital, there's no acquisition fees. And this is, you know, just to get pretty lean on that front.
Jake Clopton 11:23
No, there is, you know, there is a level of market fees, right, that, you know, we can get any deal. And, you know, typically, you know, what the things that they're very going to be very focused on is how much capital do the GPs actually have left in the deal? After you extract out the fees? Right. And that's really the biggest concern, right? I mean, I really care that some GP is, you know, getting a pointer to at closing, but what I really care about is that they still have, like, actual skin in the game, post that, and so it's like some of the deals, you know, we see that, you know, are really hyper packing fees, like a 4% acquisition fee, plus a 2%, asset management fee, plus a construction fee, and this and that, and then oh, they're also using third party management and knowledge, you know, what I mean? Like, I've seen it get really built up, and like, I don't know, it feels like I'm just financing a job. You know, but yeah, I mean, I would say, you know, market acquisition fees, you know, one and a half, it's up to 2%, you know, if they're going to be doing the manage themselves, sure. management fees. Right. But, you know, it depends also, you know, bringing up what I said before, is no access to the deal, and how it was originated. I mean, for instance, if the guys originate it completely themselves, you know, and there's no real estate brokers, and it's just a unique deal to them, those access to it, maybe they get a bigger acquisition fee of that, right.
Sam Wilson 12:42
That's really, really intriguing. So I mean, I love everything you're breaking down here for us. Thank you for that, talk us about the credentials of the sponsor, like when you guys look at because I know, that's probably one of the biggest things you look at, you need somebody I'm certain with a track record that knows what the heck they're doing. But by the time you get somebody with a track record that knows what the heck we're doing, have they not crossed that threshold where they don't need a 90%? JV equity partner anymore?
Jake Clopton 13:06
No, actually, I would say probably the opposite, right. So a lot of the guys that we end up working with, they're going into, like, the more institutional equity space, are actually making the jump from doing deals themselves using, like, you know, private investors, like friends and family money or a small pool of private investors, and they want to, you know, scale, they want to leverage it even more, right? And so what do you need to do that, you need better access to equity capital, right. And so once you move into, I mean, just think about it, like, as far as, like an operational perspective, like, let's say, you were doing, you were doing three deals, and you have 20 investors, and each one of those three deals, right? I mean, the reporting alone to all what 60 investment man, that's a lot. So if you want to scale out to 10, 12 deals you have, and each one of those is 20 investors or 30. I mean, think about, I mean, just the internal reporting, extremely cumbersome, you know, it makes a lot more sense to kind of go in to go to, you know, a little bit larger sources, where there's like, one big pool of capital that you can do successive deals with, and obviously, you're doing one investor instead of 20. On every deal, right? The guys that want to scale, you know, they're typically going to keep their equity, you know, kind of reserved for GP equity. I mean, the GP equity returns are, you know, if you leverage that without paid significantly higher, right, then just the LTV is getting, or what you get without it. So, you know, that's the whole thing. You want to keep those 30, 40% returns going leverage that into more deals, and, you know, also kind of have the bandwidth to manage that. And realistically, you're going to, you're going to want to move into more of an institutional style, you know, LP, I don't mean BlackRock, right. I mean, like, you know, smaller middle-market funds, maybe family office, but, you know, the guys that we like to use the most are, you know, and I care about the structure of the money that we're bringing to the table. You know, I'd like to use funds, right? So capital that's raised around a strategy that's being deployed for a specific purpose of investing alongside GPS, right, you know, when you start getting the private investors and family office base, you know, you kind of get a little schizophrenia, you know, there and it's like, you know, they're involved in lots of stuff and they don't have to put their money out and the stock market goes down 10% They're like, well, we can't find the deal now, because we got away, you know what I mean? So, I mean, those things happen, for sure you don't want to get left, you know, you'll get stood up, you know, at the closing table, because, you know, whatever, the Dow took a dive the day before.
Sam Wilson 15:24
So, that's really, really intriguing. That's not something I would have thought of. But I guess that is always a risk there. When you have someone bringing the lion's share the money is there. They could, I mean, until that check is cashed. They can walk. Have you seen that? Right. And how do you avoid that? If so,
Jake Clopton 15:38
I've never had it happen to me, because we, again, I target the capital that's earmarked directly for this right for our sponsors. And that matters, right? I mean, the thing is, if you got a family office, you know, or a private investor, and they're big investors, you know, you may be going along just fine. But then, you know, eventually you're going to run that risk, you know, rather than running out of, you know, because you don't really have clarity on what's going on and that side, right, and, you know, something may happen in the future. And I've seen that happen to people, right. And we've had people call me up, hey, man, I'm supposed to close next week, my equity guy just called me up said, you know, can't do it. So I was like, well give it like, “Yeah, I'm gonna commit later,” but that doesn't matter. Now, this deal, right. So, right, yeah, it happens. And I'm sure somebody listening right now has had it happen to them.
Sam Wilson 16:24
Oh, man, that would be, yeah, talk about scramble.
Jake Clopton 16:28
And oh, yeah. Last, you know, that's not one of the reasons you want to have to go back to the seller that tell him that you don't have the downpayment money right?
Sam Wilson 16:35
No, that doesn't always go over. So Well, tell me about give some best industry practices. If somebody wants to take their business to the next level, they want to bring on some JV limited partnership money from it's right in one big check, what are the things they need to be doing now to prepare themselves for the conversation with you and for your potential investors?
Jake Clopton 16:54
Right, so the guys that we use, you know, they're looking for is outside of the specific deal, they're gonna invest in a sponsor with a track record, right. And if you really just need to prove out that you've been able to do this a couple of times, and the guys that come to us or break into the space have used private investors, you know, in smaller deals, and you ramp up to the size that's going to track these, you know, institutional investors. And you know, the institutional guys are going to have a minimum equity check size of like, I mean, really like a bare minimum, like 3 million bucks, right? So you've got to have a decent-sized project to be able to get them in there. So really, you know, if I see like a $15 million capitalization deal, that's probably like a good starting point for institutional, you know, ambassadors. And I've seen, you know, syndicators, and sponsors just work their way up quickly to get up into that space. But then once you're there, you're going to kind of play around in the 15 to 35. Maybe space for the most of the time, because you're flying under that institutional radar where the returns just kind of drop off a cliff. Right? Right. And so realistically, when I put together like a package to send to, you know, one of our, you know, JV guys, you know, I really want to focus on who is the sponsor, what's their track record, you know, how many deals they entered in exit? And did those deals work out the way that they modeled them? Right, and that that's the biggest thing, like, you know, you're putting together a pro forma, how did it work out? Right? I mean, things don't always work out exactly. Like you say, you're pro horror, but that's the biggest deal, right? What was the execution of these deals? And did it work out kind of the way we're pitching as an investor to somebody else?
Sam Wilson 18:26
Right, man, I love that. Jake, thanks for taking the time to break down really the differences in the nuances between JV limited partnerships, and a lot of what we see in the securities you know, syndication space, that's been absolutely intriguing. If our listeners want to get in touch with you learn more about you or your business, what is the best way to do that?
Jake Clopton 18:44
Two easy ways, either hit me up on LinkedIn, and really easy to find or you know, our website, cloptoncapital.com, cost directly, we're around anytime.
Sam Wilson 18:53
And that's Clopton, C-L-O-P-T-O-N, dot com. For those of you who are listening, Jake, thanks again for your time today. Certainly appreciate it.
Jake Clopton 19:01
Thanks, man. Take care. Thanks so much.
Sam Wilson 19:03
Hey, thanks for listening to the How to Scale Commercial Real Estate Podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen, if you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners, as well as rank higher on those directories. So I appreciate you listening. Thanks so much and hope to catch you on the next episode.