The Problem With Partners: More Trouble Than They Are Worth

Real estate development has become a painfully slow process. Permits take days and sometimes weeks longer than estimated. The municipality rarely follows through with its original specifications on approved plans. What is a developer to do when there is nothing but obstacle after obstacle standing in the way of a new commercial, residential, or retail development? For years those in the business have dealt with these constant delays, but these have come to be expected. Now it seems a new issue has been thrown into the mixture: the problem with partners. Acquiring partners has been a way to displace liability and raise capital. They serve the wonderful purpose of bringing together people and corporations with different experiences, specialties, and connections. They also bring about constant conflict. Besides the obvious loss of profit (it must be split) there are many issues with business partnerships. When bringing together two powerful entities there are problems in the near future. Recently, in Sacramento, California, John Saca defaulted on a $22 million loan. He's learning the hard way the problem with partners. After many issues with partner California Public Employees' Retirement System (CalPERS), John Saca has defaulted on his loan for the 53 story project (pictured below on the right) amidst Sacramento's Downtown. His proposed project will attempt to drastically change the city's skyline: "The Towers" became a reality when he found CalPERS as his large equity partner and began construction in 2005.

What was started as his dream and manifested itself into a multi million dollar project may become someone else's to complete. Saca has had problems with his partner from the beginning. They have continually disagreed over every minute detail to large variations necessary for the plans and pricing of the project. Now, after months of progress construction has stopped and CalPERS brings in the reigns. The $100 million which they agreed to invest in the project has not yet been fully paid (only $25 million to date). This has left Saca in quite a predicament as there are liens totaling $13 million on this project. Saca is looking into other partners, while CalPERS looks into other solutions. CalPERS' senior investment officer, Ted Eliopoulos said "the fund recently offered Saca a deal that would have allowed him to retain a financial stake in the project but would have given control to one of the large developers with whom CalPERS currently does business." Saca would like to completely buy out the pension fund by bringing in other investors. Each side is speculated to be unwilling to compromise. CalPERS had made it clear that they want to remain involved with the Towers Project as has Saca. The stalemate costs both entities more money every day.

Could it have been avoided if these two had never become partners? Absolutely, though the project would not be run without any obstacles, these two are not good for each other. John Saca would have been better off without CalPERS looking over his shoulder and delaying the process as construction costs increased day in and day out. True, without a partner willing to invest $100 million Saca would have been unable to even think about such a venture. However, it is not so cut and dry. There are many ways to go about solving the issue of capital for an investment. There are some private equity lenders which are capable and willing to get involved in high risk lending at a higher interest rates. This would be a great alternative as it would allow Saca, or any developer for that matter, to remain in constant control of the investment. Other alternatives include bank loans (if applicable), downsizing the original project (lower cost for a lower budget), limited partner (has no managerial power), or careful selection of an equal partner. However, this is not to say that all partners are bad and that if selected carefully they cannot be beneficial.

Partners are a part of that gray area. Sometimes they are great assets, full of knowledge, helpful connections, and experience. Other times partners cause more conflict, delays, and costs, than their original fiscal investment to the project. Maybe the group projects in college are attempting to hint at the underlying dilemma’s created by partnerships.