Entity Structure Question

[Alex Hohenstein]

Hello

I’m setting up an entity with a partner. We’re purchasing an 8-plex together. He’s bringing the capital for the down payment and I’m doing the management of the property. I’m not bringing any money to the table. Initially we were planning to set it up as a simple equity split, but he has some concerns on how to structure the agreement to make sure he gets his initial investment back. He’s worried about an economic downturn, short sale situation, etc. 

I know we’re not the first to structure a deal this way. How have others structured a deal like this where one partner brings the money and the other manages the property?

[Katie Smith]

Hi Alex!

This is definitely something that should be spelled out in your Operating Agreement. I’d suggest spending the few hundred bucks to have an attorney draft it. Way easier than trying to fix problems down the road.

Your OA should cover things like:

• -How your partner’s initial capital gets returned 

• -How profits are split after that

• -Who makes the big decisions (budgets, refinancing, when to sell, major repairs, etc.)

There are lots of ways to set it up so both of you feel protected. Some people do a straight return of capital first, some do a preferred return, and some do a waterfall structure.

The main thing is to get it in writing up front. If you know exactly how money is returned and how profits are split before you even start, it makes the partnership a lot smoother and avoids headaches later..