Investor · San Francisco, CA · Member since 2015 · 302 posts · 206 votes
I just completed my first deal using all my own capital and it is within my single member LLC. For my 2nd deal I have potential partner who is willing to finance part of the rehab.
What is the best way to structure the 2nd deal from an entity perspective? I'd like to keep in all in the under the same original LLC business name yet limit the partial ownership and liability so that the new partner only has an interest in the 2nd deal.
My goal is to not have to start a whole new company with a whole new name etc... Is this possible?
Writer | Attorney | Accountant · Dallas, TX · Member since 2016 · 150 posts · 116 votes
9y
The real estate will be owned 1/2 by your LLC and 1/2 by the other party. The JV Agreement contains the terms of that co-ownership. If you want it to say that when the project is completed, it will be rented, then it will be refinanced for enough to return the initial contribution of each venturer, and thereafter it will operated as an income property with the net income divided, then you put that in the Agreement.
Then each of you would use the returned funds to enter into another deal. But if that other deal is not mentioned in this JV Agreement, it would not be covered by the terms. You need a new JV Agreement with new terms. I just like JV Agreements because they don't involve any state agencies, reporting requirements, etc.
But if you are able to determine at this time that you are comfortable in a longterm relationship with this person, it might be better to have him also form his own LLC, and then have the two LLCs enter into a Partnership Agreement instead of a Joint Venture Agreement.
A JV Agreement is useful when you want to limit everything to just one project and then it is ended.
A Partnership Agreement is more useful for permanent or semi-permanent relationships.
You said you wanted to do the deal without forming any more entities, but not give anyone an interest in your LLC, and so I suggested the JV.
Writer | Attorney | Accountant · Dallas, TX · Member since 2016 · 150 posts · 116 votes
9y
Here's an idea.
Instead of a new company, or creating a partnership, why not consider a Joint Venture.
This will allow your LLC and the partner to enter into a JV Agreement for just this one project.
You can specify all of the terms within the agreement, how the project will be initiated, each contribution, duties of each, how profit will be computed, when and how the project will be completed and dissolved.
At the end, each party reports half of the income and expenses, just like a General Partnership, but, depending on state law, there is no requirement for filing papers.
Once you work everything out with the partner, both of you go to the same Attorney, have all of the information ready, tell him exactly what you want.
Investor · San Francisco, CA · Member since 2015 · 302 posts · 206 votes
9y
@Michael thanks for the thoughtful response! much appreciated. So my strategy is to do another BRRRR deal. Would the JV agreement still work if the partner wanted to roll it over and take part in the next deal as well with the refi money that comes out? Also they would want their cut of the cash flow that comes from the rents in perpetuity.
Writer | Attorney | Accountant · Dallas, TX · Member since 2016 · 150 posts · 116 votes
9y
The real estate will be owned 1/2 by your LLC and 1/2 by the other party. The JV Agreement contains the terms of that co-ownership. If you want it to say that when the project is completed, it will be rented, then it will be refinanced for enough to return the initial contribution of each venturer, and thereafter it will operated as an income property with the net income divided, then you put that in the Agreement.
Then each of you would use the returned funds to enter into another deal. But if that other deal is not mentioned in this JV Agreement, it would not be covered by the terms. You need a new JV Agreement with new terms. I just like JV Agreements because they don't involve any state agencies, reporting requirements, etc.
But if you are able to determine at this time that you are comfortable in a longterm relationship with this person, it might be better to have him also form his own LLC, and then have the two LLCs enter into a Partnership Agreement instead of a Joint Venture Agreement.
A JV Agreement is useful when you want to limit everything to just one project and then it is ended.
A Partnership Agreement is more useful for permanent or semi-permanent relationships.
You said you wanted to do the deal without forming any more entities, but not give anyone an interest in your LLC, and so I suggested the JV.
Developer · Philadelphia, PA · Member since 2015 · 2k+ posts · 904 votes
9y
Nicholas Lohr I would first urge you to look at it from your future partner's point of view.
Cash is king and if your partner is putting in the money, chances are they will want the deed in their or their entities name or in escrow but NOT in an entity they do not control.
I am assuming this is a flip but if not there are other considerations.
What equity split do you have in mind? What are the roles and responsibilities of each party? What happens if one or both parties do not perform? What if there is a loss? What is a partner dies or is incapacitated?
These are just the tip of the iceberg to consider for a JV agreement.
Investor · San Francisco, CA · Member since 2015 · 302 posts · 206 votes
9y
@Account Closed In this case my potential partner is more passive. I am the one funding the downpayment, dealing with the banks, the contractors, the tenants etc.. and he is just taking care of the rehab cost. And this is a buy and hold BRRRR deal rather than a flip. My thought was an equity split according to how much actual cash we each put in, but then me having a much greater share of the cash flow because I am the more active manager in the project. Still think a JV deal is best? thoughts?