Partnership Structure--Buy and Hold

Buying & Selling Real Estate
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Partnership Structure--Buy and Hold

Clay Manship
Indianapolis, IN · Member since 2013 · 549 posts · 310 votes

I'm hoping there is an easy answer for this question:

Myself and two friends are looking to buy a 4-plex here in the area. The purchase price is $100K, turn-key and 100% occupied. We will be putting 25% down, or $25,000. However, the original equity into the project will not be divided equally among the parties. It will look like this:

Me - $5,000

Partner 1 - $5,000

Partner 2- $20,000 (we are collective $5,000 extra for minor repairs and an operating account)

My question is, how can we structure this so that 1) we all own our prorated equity share in the project and 2) all are guarantors on the loan under our prorated amounts. For instance,

Partner 1 - $5,000/30,000 invested = 16.67% ownership. Partner 1 should also be responsible for 16.67% of the debt on the property.

The best way I can configure it is to put the Note, Title, and Mortgage in the name of an LLC, but no banks will do that anymore. If one individual took title to the property, but made all three partners co-guarantors in their prorated amounts, could that individual then quit-claim deed the property to our created LLC?

Looking for some pointers here, as I believe this is some (very) small syndication deal. All you deal structure folks, help a guy out!

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Travis Sperr
Lender · Denver, CO · Member since 2009 · 1k+ posts · 597 votes
12y

@Clay Manship your assumptions are correct in that a typical lender is not going to lend to an LLC - although a local bank may do so with personal guarantees, likely requiring all three to sign in this situation. A good way to structure would be via an LLC with a clearly defined operating agreement - very specifically spelling out roles and responsibilities.

To go one more step outside of the financing piece i would really encourage you to take a look at what you are getting into. I don't know your experience but 3 partners on a deal this size where one is putting up the majority of the money, especially with financing involved sounds like a bad idea to me. 

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  • Eric TaitPro Member
    Investor · Houston, TX · Member since 2013 · 314 posts · 146 votes
    12y

    From what I have seen, most lenders are going to make either all of you guys or one of you guys responsible (the stronger party).  I am not aware of lenders slicing and dicing debt in such a way.

    In my syndications, as lead partner I am usually responsible for the debt initially, and for that I will take a bit more equity than my contribution at times.  

    I suppose you could try and find a private lender who is willing to allow this arrangement, but I am not familiar with it.  

    And I, just as you, are looking forward to others chiming in on this.

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  • Travis Sperr
    Lender · Denver, CO · Member since 2009 · 1k+ posts · 597 votes
    12y

    @Clay Manship your assumptions are correct in that a typical lender is not going to lend to an LLC - although a local bank may do so with personal guarantees, likely requiring all three to sign in this situation. A good way to structure would be via an LLC with a clearly defined operating agreement - very specifically spelling out roles and responsibilities.

    To go one more step outside of the financing piece i would really encourage you to take a look at what you are getting into. I don't know your experience but 3 partners on a deal this size where one is putting up the majority of the money, especially with financing involved sounds like a bad idea to me. 

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  • Clay Manship
    OP
    Indianapolis, IN · Member since 2013 · 549 posts · 310 votes
    12y

    @Travis Sperr 

    Thanks for the insight. Trust me, I go back and forth with it all the time. The basics of it is that I have a lifelong friend who wants to get into REI, but is afraid to do so on his own. So he wants me and another partner to hop into a single project with him.

    That is the only way I can see it--a very clearly defined operating agreement and an LLC being on the Note and Mortgage with personal guarantees. Any more thoughts?

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  • Travis Sperr
    Lender · Denver, CO · Member since 2009 · 1k+ posts · 597 votes
    12y

    @Clay Manship 

    I may be a little bit of a cynic. I might find a way to structure this differently - maybe you help manage the property, or consult for a fee without any cash in the deal. Or define the operating agreement that he would buy you out in 3 or 5 years. The way it is structured you have all of the experience and he has all of the control as the two smaller investors have no control, by that I mean your two votes don't outweigh his ownership- when is it time to sell, replace the roof, raise the rent, evict a tenant, etc. 

    If you do move forward as planned, I would see if the largest investor can qualify for the loan on his own, then title in the name of the entity. The reason for this is if you put 5k in the hat you are still going to be responsible for the full debt with less than 20% ownership, potentially keeping you from doing other deals from a DTI standpoint.

    Not sure what the rents are on this property, but building the reserves is going ot be so important out of the gate. Friendships get weird in month six when there is an eviction and the business can't pay for it without a capital call. 

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  • Arlan Potter
    Investor/Accountant/Builder · Meno, OK · Member since 2014 · 1k+ posts · 918 votes
    12y

    I see no real reason to do this partnership. What benefit is it. Why does the guy with $20K need the two junior partners. It could end bad(no more friends). Each should become an investor on their own.

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