How does a Sponsor buyout the limited partner?

8 Replies

I have studied many types of Equity structures in a syndication scenario with various types of preferred returns, equity hurdles, and more, however I have not been able to find anything about how a sponsor can buyout the equity limited partner in a long term hold scenario. Typically I have seen an exit strategy as a sale at the end of a hold period between 5-10 years, but I am interested in holding for very long terms so am trying to figure out how I can buy out the LP's who invest upfront while providing them a fair rate of return on their investment with me. I have used straight debt from hard money loans to purchase small apartment buildings, but I am looking for another scenario as some of those investors have asked to be equity partners, but I would like the option of buying them out at some point. Any ideas of how to structure a deal like this would be very helpful.

Thanks

It's not a question of how, but why? Why would a limited partner want to walk away from the appreciation by allowing themselves to be bought out?

If you want to do a deal whereby private capital facilitates the purchase only to be refinanced out, just do it on the debt side.

@Ben Leybovich . Thanks for your reply...very valid points, but let's just assume that maybe the investor wants to achieve a good cash on cash return for a period of time, but does not want to remain for a very long term. My strategy is very long term...with the idea of creating enough passive income after a period of time to live comfortably in retirement...with the idea of paying off the mortgage sooner rather than later. The investor may want to make a good return but not be in it for the long term.

I am really looking for a creative way to bring the investor in, pay a good return, but have an out for both parties at some point that is mutually beneficial. This is a buy and hold strategy.

Do you have any suggestions?

Thanks again

@Daniel Gorman Reasons a LP would want ending: Maybe they want out because of their age and don't want to leave spouse a headache when one dies. The kids or grandkids are going to college in so many years. They will be in lower tax bracket in future. They don't want to stay in past the point of amortization being a phantom income instead of tax shelter. Their IRR will be higher with a kicker at end. They want to give more to a charity in future. The property is gonna be older and they hate capital expenses. They believe a certain property type is gonna be worth less in future. They believe cap rates are gonna be super low in future. They believe a ression will come and they want to go to cash and wait on better deals. They won't need tax shelter when they retire. They are gonna start a business in the future. They want move out of country when they retire. They had an uncle tell them to only do 10 year holds. They will have another ex wife by then and have to pay for another wedding.
@Daniel Gorman When I meet with an investor it's like a counseling session. I ask. They answer. I write it down. I ask a question from that answer. They talk. I write it down. It might take hours. When I'm done, I know what they like, where they like it, how long they want it, why they want it, how much of it they want, ect. And do know anyone else that might want it. I offer them something I have, or create, that I know they will like. If it's short term deals...I got one. If they are buy, hold, and let kids inherit..I got one. If I offer something they turn down, I reach in my other pocket and offer something else.
Originally posted by @Daniel Gorman :

@Ben Leybovich. Thanks for your reply...very valid points, but let's just assume that maybe the investor wants to achieve a good cash on cash return for a period of time, but does not want to remain for a very long term. My strategy is very long term...with the idea of creating enough passive income after a period of time to live comfortably in retirement...with the idea of paying off the mortgage sooner rather than later. The investor may want to make a good return but not be in it for the long term.

I am really looking for a creative way to bring the investor in, pay a good return, but have an out for both parties at some point that is mutually beneficial. This is a buy and hold strategy.

Do you have any suggestions?

Thanks again

This type of investor would be better off on the debt side, with no exposure. You see, in exchange for access to appreciation and tax benefits, which are only available through a partnership structure, the partner exposes themselves to potential loss and liability. If all they want is cash flow, give them a note and mortgage/deed of trust, and pay them. If you default, they foreclose. But, if things go well, they are out of the appreciation and tax breaks.