How to Finance the Next Stage of Your Property Management Company's Growth | Jordan Coleman

A Podcast | Jordan Coleman

Pete Neubig: Welcome, everybody, to the NARPM Radio Podcast. I'm your host, Pete Neubig, the voice of NARPM. So thank you for listening today. We have Jordan Coleman, loan officer at Live Oak Bank, who specializes in financing solutions for the property management industry. He works with property management companies and owners to structure tailored lending solutions, whether that's funding acquisitions, securing work capital for marketing, hiring, or software, or refinancing existing debt to improve cash flow. Jordan, thanks so much for being here.

Jordan Coleman: Yes, thank you for having me. Super, super excited to be here.

Pete Neubig: So just tell us a quick, a little bit about Live Oak and how you guys got into the property management industry.

Jordan Coleman: Yeah, so the bank started almost 20 years ago. And we are super, super unique in that we don't focus on territory or geography. We focus on industry. So we have built out teams, lending teams, underwriting teams, closing teams, that specialize in specific industries. And we've got about 40 different of those industries. And property management, we got into about three years ago now, six months to do the white paper, present things to our credit team, and then said, hey, this is an industry that we really want to get into. So we built a team around property management so we could specialize in tailored financing solutions, understand how property managers are looking to grow, what their potential needs are going to be. And so really dove headfirst into the property management space. And three years later, here we are.

Pete Neubig: So let's talk about, you got like three different ways on how most people use you guys. We'll talk a lot about the purchasing of property management companies. But let's talk first about, okay, so you're able to utilize to refinance debt to improve cash flow. So let's talk a little bit about that, because I could have used you guys about seven, eight years ago, to be honest with you. We had a line of credit with Chase, and it was eating our lunch, and we could have restructured that debt. So talk about how some of your clients use that, and what the product looks like.

Jordan Coleman: Yeah, so most of these different options that you're talking about, we're going to talk about today, are going to be SBA type products. But we are the number one SBA lender in the country. So we are what you call a preferred lender. So that allows us to do everything in-house. We do everything on behalf of the SBA. We service our own loans. We make our own decisions. And in regards to a refinance type transaction, this is really going to be for potential seller note debt. You know, back in the day when someone did an acquisition to buy their current property management company, they didn't really know that there was much of a different option or solution other than seller note debt or taking out a HELOC. And so we can refinance that to save on cash flow. We could also do refinancing of existing startup loans. If you got a startup loan that has an extremely high interest rate, and we can save you cash flow there, we can most certainly look at doing some type of refinance on that side of things. Also, line to credit, different business credit cards are all things that we can look at trying to help refinance to help you save cash flow. So any business debt that you have, we want to structure to save your cash flow.

Pete Neubig: And is that typically like, what are the terms typically on something like that, on a loan like that?

Jordan Coleman: Yeah, so in regards to terms, it's going to be a 10-year loan term, which is going to be a fully amortizing loan. No balloon payments. There's no prepayment penalties involved. Typically, there's no equity injection where you're having to come in with cash for the refinance piece. So very favorable type loan terms. We can also look at refinancing existing commercial real estate debt. If you have a property that you're operating out of and it's a conventional loan or you have a balloon involved, we can look at refinancing that debt as well and save you cash flow there. And that's a 25-year loan term.

Pete Neubig: Oh, very nice. Now, you keep mentioning SBA loans. So why is that so important?

Jordan Coleman: Yeah, so an SBA loan, it's a small business association loan. So it is government backed. You know, the stigma is it's a government loan. And so some people kind of shy away or don't even want to entertain it. But when you actually start understanding the SBA product and you have the right lender that understands the SBA program, it's really not as scary as you think and not much different than like your typical conventional loan, other than it's less equity injection. You've got longer loan terms. You've got better debt service coverage. And so you're going to have more favorable terms on an SBA loan. But you do want to make sure you have the right lender that understands the actual product and is a preferred lender. So if you're going to your local bank or any bank, ask questions about what is their expertise? Have they done a property management loan before? Have they seen a property management books before? Does your lender really know what they're talking about?

Pete Neubig: No. The answer is no.

Jordan Coleman: It's a complex industry. If you really don't know. I mean, there's a lot of different areas of hardship in the industry in itself.

Pete Neubig: And most times they're just like, well, here, just go to this link and you can download the SBA form and go fill out the application yourself.

Jordan Coleman: Yeah. And you don't want to do that. You don't want to go through the SBA to actually get the SBA loan. That's going to make the process a lot longer. You want to make sure you're working with the bank where you're going to have the direct relationship with. And again, that they're a preferred lender, so they never go to the SBA to do any of this. We're doing everything in house.

Pete Neubig: And then you're also saying like, hey, you don't have any debt, but you want to really increase your business. And instead of going cash negative or taking out a HELOC, you guys would loan on that as well.

Jordan Coleman: Yeah. So we do want to make sure the business itself is cash flow positive. So whether you're taking out refinancing debt, you're taking out new debt. We do want to make sure that it's going to be a good decision for you as a business owner. And we do have different products based off of where you are in your business plan, whether it's refinancing existing debt to save on cash flow, whether it's working capital for more of that organic growth, whether it's hiring BDM, whether it's hiring marketing, whether it's using an outside vendor to kind of help utilize your services, or maybe it's an acquisition. And instead of an organic growth path, you're now acquiring doors. We could help finance that side of things as well. So it's really dependent on what is your growth path as a business owner. And we want to talk through that. We want to give you these different options, put you in a position that makes the most sense for you on where and how you want to grow.

Pete Neubig: Makes complete sense, right? So if I don't get the loan, I may just say, OK, I'm going to be cash flow negative for 90 days or 120 days. If I can get the loan, it's like, oh, now I have the loan. I don't have to go cash flow negative. The loan allows me to hire the BDM, do the marketing, all this stuff. And then I just got to pay back the loan, which is I'm only paying back what I'm borrowing, I'm guessing. It's like a HELOC. And then my salesperson works, my marketing works. And five, six months later, I pay back the loan. When I pay back the loan, does the loan go away or do I have it for a length of time? So if I'm going to use it again a year or two later, or is it every year you have to renew it?

Jordan Coleman: Yeah, so it's a term loan when you're doing a working capital loan or refinancing existing debt. So it's a term loan that you'll get the full amount on day one. If it's a refinance, you're paying off your existing lender. If it's a working capital loan, that working capital loan gets directed and funded to you as the business owner. And that debt is amortized over 10 years. So you do have a monthly reoccurring payment, but there's no prepayment penalty on it. So you can pay that debt off in a year or two if cash flow allows and you've hired the right people. And now you're soaring through your cash flow. And maybe in the next two years, you decide to do it again and get another small working capital loan. Or you find another acquisition and you've got a $5 million SBA runway to play with. So we do want to make sure, again, cash flows there, what you're getting out makes sense for you as a business owner. But you've got a lot of runway to play with to grow your business. But you do want to make sure it's the right path and right avenue of growth for you as the business owner.

Pete Neubig: Really, you guys are an incredible vendor and an incredible tool for property management companies to grow or to stop a loss for a little bit and then grow. So having you guys as a tool in the tool shed for property managers, I think is amazing. And I'm glad you guys are in our industry. So you have worked with lots of people who utilized Live Oak to purchase property management firms. So I know that's kind of a big hot topic these days. So let's talk a little bit about this. So what are some of the biggest mistakes that buyers make when they're buying a property management firm? What are you seeing out there?

Jordan Coleman: Yeah, so the biggest mistakes are, one, not really knowing what they're buying or not buying in their immediate market. Or, you know, geographical area where it's maybe a first time individual into the space. They just, you know, graduated somewhere in New York. They're wanting to buy a business out in California. For us, that's a little bit of a red flag where we would not really get comfortable with that type of transaction. But you as a buyer, you want to make sure you understand what it is that you're actually buying. From a concentration standpoint, understanding the total number of units, what type of servicing units are they providing. You know, if it's a full-on HOA management business and you only do single-family rentals, does that make sense for you? Are you trying to get into the HOA management space? So understanding the actual portfolio and have a business plan. Understand what does this look like for you post-transition? Is this an expansion loan? Is this your first time acquisition type loan? How are you going to either merge your two companies? What does staffing look like? So understanding what's included in the company that you're buying and how are you going to be able to transition into that company as the new owner?

Pete Neubig: Okay. So let's go through the process here. Let's say I see a company that – let's say I'm looking to buy a property management firm. Now, before I even find the deal, I need to probably make a call to Jordan over at Live Oak Bank and get pre-qualified. Is that kind of step one? Like even if I'm thinking about buying something or – because I think once I find something, it could be already too late, right? It's like I want to be able to be pre-approved and be able to move fast. So is that the kind of first step?

Jordan Coleman: Yeah. So the best way to begin the process is let's talk about it even if you haven't found anything in mind. The first initial conversation is going to set you up for either what to look for. It's going to set you up for how to approach this. What do I need to do? The bank can go ahead and look at all of your information to confirm, hey, everything looks great on your end. We do most certainly want to partner with you on your growth.

Pete Neubig: Would you also let them know what doesn't look great and so that they'll fix that as well?

Jordan Coleman: Yeah. If there's something where we say, hey, trends don't look good on your existing business, you need to work on managing expenses and turning around your margins. Or you've got too many wages that are kind of pulling your cash flow down. We hop on calls and walk through cash flows and make sure that you understand from both your existing business and the seller's business of what it looks like from a cash flow perspective. And then, of course, there's vendors all out in the space that can really truly help you with your metrics. But we can most certainly be the starting point of this is why we're not comfortable with one thing or another. And let's kind of look at fixing this. And this is what needs to happen for us to get comfortable with.

Pete Neubig: So if I own a property management firm and I like at one day, I want to buy something and I think I'm kind of close. Maybe I'm a year away. I can reach out to you, say, hey, I need to do kind of a study on me. Tell me what I need to work on or what looks good. And then you can be like, hey, this is what you need to work on. Let's meet six months later or a year later. And then you're like, hey, this is what's good. And then this is what you can buy. Would you kind of like almost like what for me to buy a house? Like this is what I can't afford is like orders orders orders that you didn't say that. Like, hey, just go find something and we'll let you know if it works.

Jordan Coleman: Yeah, it's more like, hey, we want to partner with you. You have a great business. You have a great personal balance sheet. We most certainly want to help assist in some type of financing. But the loan amount itself is really going to be dependent on what you're acquiring, because that's the business that's going to be supporting the overall debt and the overall cash flow. And if that business can't support the debt, that's where we hop on a call and say, this is what this business can afford. We need to start renegotiation, renegotiating purchase price with the seller. Or we need to talk about what's going to make sense to meet your debt service coverage ratio. You're protected as a buyer because we don't want you to overpay for a business that can't support its own debt. That business really needs to be able to support its own respective purchase price and own respect.

Pete Neubig: So what are some of the things? OK, so I get kind of, I'll call it pre-qualified, but I've had a couple of meetings with you. I fixed all the things you told me to fix. Now I find something. What are some of the things that I should be looking at in my due diligence or even before due diligence when I just get an LOI or something like that? Letter of intent. What am I? What am I? What are some of the things that I should look at? Kind of phase one before I really get under the hood.

Jordan Coleman: And you're referencing like an acquisition. Thank you. Yeah. You want to look at, again, territory and geography, the portfolio makeup, owner concentration. One, does the seller own any of these doors? Is it very small amount, which is what they have?

Pete Neubig: One owner owns 80% of all the doors, right?

Jordan Coleman: Correct. We don't want to see one individual also owning a large portion of the portfolio. We really want to see maximum 20% concentration of one owner, which is still very, very high. Really want to see that where it's very, very diluted. Also understand the staffing aspect of things. Are you going to keep all of this staff? Do you have your existing staff if this is an expansion? Understand what's coming along with the actual acquisition. What software do they use? Do you need to merge it under something different? So understanding kind of behind the scenes of how is the business operating is important to really kind of start making sure it's the right business for you to acquire. And I always say, look at Google reviews. Do they have okay reviews? Do they have not a ton of reviews? Has there been a lot of employee turnover? So kind of understanding the culture of the business may be a key as you're looking at the right business to buy and acquire.

Pete Neubig: Do you guys look to see if it's an asset-based purchase or if it's just an assignment-based purchase? Does it matter?

Jordan Coleman: We'll treat it to be just about the same from a cash flow perspective, whether you're buying the business or whether you're buying the contracts solely because you have an existing business. You know, it would be treated a little bit differently if you're an existing operator buying more contracts. But we're still going to want to understand the bottom line cash flow. There may just be more adjustments and add backs that we can make because you don't need the lease space. You don't need the staffing. You don't need certain aspects of the company because you already have that included in your existing business operation.

Pete Neubig: Right. So like they have a bookkeeper on staff, but I already have a bookkeeper on staff and I don't need two bookkeepers. So I can save a little bit of expense in that respect.

Jordan Coleman: That's correct. Okay.

Pete Neubig: So now I'm doing the research. What are you finding out there as way of property management firms being valued at? Are you seeing top line revenue? Are you seeing EBITDA? Does it change based on how much revenue a company brings or how big a company is? What are you seeing out there? Yeah.

Jordan Coleman: So the question of the hour, what multiple are you guys using in this space? And it depends. It varies. It varies on a couple of different factors. We as the bank and as a cash flow based lender are still going to typically underwrite and look at an adjusted EBITDA figure and a multiple versus top line revenue. Again, cash flow based, we're looking at our debt service coverage, even if we're including adjustments and add backs. But it also varies on door size. So depending on your door size and how profitable that business is, is also going to find a different threshold of multiple compared to a smaller door count or maybe a company that's not quite as profitable. So on the smaller loan size or door size and maybe not quite as profitable company, you're probably-

Pete Neubig: All right. Yeah. We had to chop this up because we lost the internet connection. So we're back. And so Jordan, just finish that thought. You can brokerages, no-go, maintenance companies, yes. And then we asked, where can we find them? Right. So you said that was the next big question of the year. So one is what's the multiples and two is how do you find them? I asked if you had a secret society. You said you do kind of just kidding, but you said that. So tell us what's the- What have you found where people are finding PM firms for sale?

Jordan Coleman: Yeah. So it's, you know, again, we do not connect necessarily buyer and seller. We do keep a running list of buyers and sellers because we do talk to a lot of people in the space. But I would always say your network, your local community, whether it's a local chapter, whether it's at a trade show, it's kind of the best way to just start getting your name out there that you're wanting to buy and or wanting to sell and try to utilize that network on trying to find a company. And maybe it's not today that you have any success, but it may be in six months down the road where you've had the conversations and then your name pops up and then they kind of remember you came and spoke to them. And so, you know, networking and word of mouth is it's always kind of what I say to help find that business to buy. Of course, there's always, you know, the biz by sell websites and the broker represented websites to try to find that right business to buy as well.

Pete Neubig: Letting people know, right? That's the main thing. And I'm going to throw my friend, Deb Newell. She created the first marketplace for buying and selling property management firms. So it's PMXMarketplace.com. And for us old folk, it's www.PMXMarketplace.com. Jordan, if somebody's interested to learn more about Live Oak or to just connect with you, what's the best way to connect with you?

Jordan Coleman: Yeah, I would say the easiest is LinkedIn. It has my cell phone. It's got my email address. You can also send me a message. You could also Google Live Oak Bank Property Management Lending and my contact information will pop up there. You know, reach out. Let's have a conversation. Let's, you know, again, even if it's not today that you're looking to buy or acquire, have the conversations, set yourself up, get ready and prepare so we can get there for you.

Pete Neubig: Yeah. And look, you may not be ready to buy, but you might want to restructure debt. You might want to hire that BDM and put some marketing to really grow your company. So those are all good reasons to reach out to Jordan. And then if you are listening to this and you're not a NARPM member, shame on you. Go to narpm.org and call them at 800-782-3452. And if you ever are in the market for a remote team member, give me an email. Shoot me an email, pete.vpmsolutions.com. We think we have over 48,000 profiles on the platform. We have over 60 training courses on the platform where those remote team members get certifications. It's all free. The remote team members end up paying us the 10 percent. Jordan, thanks so much for being here. See everybody.

Jordan Coleman: Bye.