What to do with a Silent Partner

Question

Hello, I currently own a well established restaurant and would like to open a second location. I want to buy the next location so that I could grow my business plus begin to invest in real estate. I currently do not have the amount I need for the full downpayment, plus I do not want to leave my current business at 0 in its savings. I have someone interested in being a silent partner. My question is how or what would a silent partner get from a deal like this, or what can I offer if they would provide 20% of the cost of the building only? So basically they would be putting in 20% of the purchase price of the actual building only. I could cover closing costs and the rest needed to get the restaurant established. It is a pretty popular restaurant so I am sure sales would do well. Appreciate any input.

Chris Seveney · Answer

have it be a loan not be a partner. The loan could be secured by the property as a note and mortgage and that way you define the payment structure and interest rate to pay them. They get no upside but are downside protected because if you did not pay him he could foreclose on the property to collect what is owed. That is my recommendation (also called it being a debt vs. equity investment)

Henry Clark · Answer

Since you’re not new to the restaurant game.  Go with the outright purchase or a predefined option to buy.  If you have a successful business and then try to negotiate you have no power.

Gabriel Graumann · Answer

@Esther Rivera love the idea of owning a property you also use for your business. As @Chris Seveney already shared, the easiest option would be to utilize debt to secure the funds for purchasing the property. Assuming the person you have in mind has the capital and credit necessary to purchase the property and meet the lenders requirements, that would get a deal done. As @Michael K Gallagher shared, there is some benefit to putting yourself in a position to be able to perform a sale-leaseback option or other refinance once the property is open and has the financial capacity to do so. However, the question to answer to know which path to take is really "what are you trying to accomplish with a purchase." If you're trying to control your rent, owning and not leasing is the method to do so. There are a variety of ways to find the capital to make that a reality. Location is key for your expansion as Michael shared, so don't compromise on location to afford price if at all possible. Ultimately, should the business not succeed or perform as well as you intended, owning a property in a strong location will be attractive to other users that you could choose to sell or lease to yourself. Don't put yourself in a position where you only have one exit strategy.

Esther Rivera · Answer

But replying to @Michael K Gallagher

My desire is to own the property to begin to grow my real estate portfolio. I have a great opportunity for lending since my restaurant is already well off and they would consider the businesses financials for the loan. The building is ready to just take over as it was previously a restaurant too. Needs very little investing to the actual building (minor esthetic). The property is in a great location for a restaurant (strip mall with several restaurants).

Esther Rivera · Answer

sorry that previous reply was for @Chris Seveney

Esther Rivera · Answer

@Michael K Gallagher that's a good idea! If I got a business loan for the downpayment (easily be done) would that affect in some way once I purchase the property? Would that affect the underwriting process?  I know for personal home they tell you not to make any large purchases, so just wondering if it works the same.  What would be a decent payment structure and interest rate to offer the lender?

Michael K Gallagher · Answer

@Esther Rivera what is your desire to own the property vs lease it for your business?  there are several things to consider here when considering the two, although a great option when you are in this position could be to purchase the building, make any necessary improvements get your business up and running and get your business set up on a lease in the building.  That way you can turn around and do a sale lease back on the building, recapture your capitol and execute essentially a BRRRR  with your own business and property.

Generally though many properties that will be the ideal locations for a restaurant will likely not be available for sale, they tend to be ideal single tenant free standing buildings that are quite desirable and have many end users that would be interested.

Something you don't want to do in this situation is to make sacrifices on the location/market of your restaurant just to purchase the property.  The location and its surrounding market dynamics should take the  over all else.  reagrdless of its a sale or lease situation.

What to do with a Silent Partner

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