Win-Win Partnership Agreements For Multi's
I have a couple of partners with cash, collateral, or both lined up to invest with for my next deal (hopefully 100+ units).
I would be doing 100% of the legwork.
I'm interested to hear about examples or ideas for successful, fair, win-win partnership agreements.
I realize that any agreement we come to that works for us that is mutually agreed upon is leagal and will work. I'm intersted to hear about agreements that have worked for others.
The Ideas I've though of thus far are:
1. Treat investors as lenders and give them a fixed return.
2. Have each party have the same ownership percentage as the debt service that they're responsible. In other words: Property = $1 Million. One partner brings $200K to the table, and incurrs no debt. I bring no cash to the table but get a 80% LTV loan. Partner gets 1/5th of NOI, equity, appreciation, and tax benefits.
Second questions: what type of entity would you recommend for this type of deal? LLC? LP? REIT?
Thanks for your input.
Hi Dave,
I am thinking that for security reasons I would prefer an LLC. The reason being that if another partner screws up, or a tennant sues, a judge cannot force the sale or distribution of LLC assets.
So, If I were sued, had invested 200K with you and lost a judgement. I would ask you (the general partner) not to distribute any $ to me and hold it in the LLC. My creditor would get tired after a year or two of not getting anything. I would then settle for a fraction.
My question would be, IF I were to put 200K into a joint venture what would my return be?
If it weren't real substantial, there is no way I would take only a 20% stake in a million dollar deal having put up all the $$
I have been looking at 20-30 unit multi's with some of the same questions in mind.
Do I want to take my 150K and use it? or get an investor?
I did a deal last month that was 1500% cash on cash return.
I will follow this post and see what develops.
YOu might check with Peter Conti and Dave Finkel on their website. They do a lot of multi's and have a real decent course I have been listening to.
Randall
Randall,
Thanks for your thoughts. I don't want to be insulting or come off as selfish when I talk to these people, and I sincerly do want to create a win-win relationship.
I agree that I would never accept only 20% state for putting up a down payment. That said, these are investors who don't want to learn the business, run the business, or take care of it. Their money is currently held in checking accounts doing a whole lot of nothing.
The partners I am talking to know that RE is a good place for your money, but don't want to worry about it. Additionally, I believe in buying (apartments included) from motivated sellers. It's one thing to put your money into a FMV deal. It's something else if you're buying .60 cents on the dollar, and walking into equity, which is what I would like to offer them when I find the right deal.
I'm coming to realize that strategic partnerships are a great way to go, as long as you can make everyone happy. I'd love to hear more of your thoughts. Thanks.
I am not sure I would want to get someone who knows nothing about RE into a large apartment deal. The exception might be if I was trying to help very close friends and there was complete trust.
Since they are getting nothing on their money where it is they might really like 4 or 5 % on a loan. This might work if you found something for $.60 on the dollar so your cash flow would support the additional payments on their loan.
You would likely have fewer entanglements and less unfulfilled expectations to deal with.
You have probably considered this and dismissed it, but it is just my bias concerning partnerships with unsophisticated gentry.
I was recently looking at this type of scenario. We were looking at partners, but offering the fixed return scenario you talked about. They wanted 12%, a pretty attractive return. Suited us because we wanted to keep the equity, and the cash flow could support it. Additionally, if you keep the term short you can refinance them out in 18 months. Everyone's a winner.
Hibby,
Setup a General Partnership similar to a REIT and offer % to limited partners. This way everyone shares in the profit, but you as the GP, should get a % of the LP's investment as the "legman" perse?
You do not need to follow the rules of the securities 12b1 and such. Just create a friendly offering memorandum and sell shares to friends.
Good luck.
I want to point out first that I have not done what you are talking about, but what you are doing is exactly my long term goal. 70% of my research has been precisely in the area of multi-unit residential.
If you put yourself in the shoes of your investor, you can get a decent idea what they are looking for when you talk to them, etc. From the info I gather, it seems that you have an individual that has no RE experience and simply wants to put his/her money somewhere and leave it. To me, this sounds like what a lender would do!
I would think that your goals would be best accomplished by setting the property up in an LLC (owned 100% by you) and give your investor a note and mortgage on the property.
If the investor insists that he/she have ownership, you could structure the LLC in that you have 80% ownership; the investor 20% (NO NOTE/MORTGAGE). Then you could arrange the distribution of profits however you'd like. Consider the following and/or variations:
1. For the first 5 years investor gets 80% distribution, you 20%
2. Investor gets 80% profit distribution until he/she gets his investment back...then 20% them/80% you
There are several key things here. Talk to a good accountant AND attorney for both viewpoints...ponder over what they each said, then go back for clarification!
It seems that the straight % return with a note/mortgage would suit better as there could be an unlimited number of difficultites otherwise. Just make sure you keep at least 51% of the LLC ownership so that you can elect yourself manager and such.
Additionally with another person who owns part of your LLC what happen when your needs change and you are looking to sell the building or whatever may come along. With someone who legally owns part of that LLC you could have some potential problems.
Thanks for the inspiration and good luck![ Edited by myfrogger on Date 11/15/2003 ]