How does a Sponsor buyout the limited partner?

Question

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

Ben Leybovich · Answer

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 · Answer

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.

Daniel Gorman · Answer

Thank you both for your comments.

Daniel Gorman · Answer

@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 · Answer

@Jason Dillard. Would you possibly have a suggestion of the structure of a buy out option?  I know they can vary greatly as with anything, but just trying to get an idea of how.  Thanks so much

How does a Sponsor buyout the limited partner?

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