Partnership idea - looking for feedback!

[Craig Garrow]

Hey everyone! I’ve been talking to a good client of mine, and we are thinking of forming a partnership to acquire a couple of small local self storage facilities. We’re hashing out some details, and this is sort of what we’re coming up with: He will pay cash for the properties, and in exchange for my management of the deals, and a very small fee (about 5% of the purchase prices) I’ll get an option to purchase the properties in 5 years for today’s price. We have determined what he wants for a return annually, and we’re going to split everything above that 50/50. He’s 65, and I’m 32, so he’s looking to just get some stable cash flow for a few years, while my payoff would be mainly in the form of sweat equity, with some small cash dividends every month. Just looking to see if anyone has done a deal similar to this, or if anyone has any suggestions or feedback. Could be a home run for me, especially if we’re able to get the NOI up on these!

[Michael Wagner]

I like the creativity!  I love that you have spelled out the buyout parameters up front....too many folks leave gray area that results in another round of negotiation on the exit.  Its wise to avoid that as you seem to know! Is his return guaranteed (meaning if the property performance falls off, you have to come out of pocket to get him his desired return? Or is that return ONLY paid if the property can afford it?  Hopefully the latter....and you'll want to specify how those returns will be paid...monthly, quarterly, annually.... Longer is better of course as it will allow for the thin months (like when you get 10 feet of snow that needs to be plowed:).

What do you expect the Value to be in 5 Years? What do you project your income to be annually?  How does that compare to how much time you expect to spend?  The structure itself is viable assuming you have an IRONCLAD agreement in place.  

Just some things to think about.