An attorney I know has approached me on starting an investment fund with him to invest in residential properties. He knows I have been rehabbing REOs, trustee sales and short sales with success and wants me to run the acquisitions and manage the rehab and sales of the properties. He has several high net worth clients that he knows would be interested in passively investing in the fund. Since I am also a Realtor I would also be able to list and sell the properties as well.
I wanted to see what some thoughts would be on a fair setup for this type of deal. We will likely offer some sort of preferred return to the investors and then a profit split along the lines of 50/50 on the net profits, but I would like your thoughts on what is fair between me and the attorney that would be setting this up. I am assuming we would both be managing members, would we split our side of the profits 50/50? Once it is initially setup he won't have much to do as far as day to day operations go as I will be the one doing all acquisitions and management of the deals.
Any feedback is appreciated.
I don;'t know if you are aware of the issues here but the moment you say "interested in passively investing in the fund" you complicate things immensely. The key word being passive.
Is the attorney familiar with SEC Regs and will he be the one creating the private placement docs? In concept what you want to do is a great Idea but many attorneys simply aren't aware of the SEC regulations required if it is not their primary area of practice.
50/50 is a typical split between and working partner and a money partner. However here you have something a little different. It sounds like you are not talking about a deal by deal partnership, but about an ongoing blind pool.
A better way to figure this, is to learn what your typical target investors expect as a return. You (or you and your attorney) get everything else. If there is not enough left over for you after the investors get their expected return you simply don't set it up.
There are lots of theads here about SEC regs and why they apply.
Good luck - Ned
Thanks for the reply. Yes, he is familiar with the SEC regulations and he would be the one creating the PPM.
I agree on the 50/50 between the investors and the managing partners, I'm just trying to figure out how to split our 50%. I don't know how much ongoing work the attorney would have to manage once everything is set up. I know it would become a full time commitment for me. I am assuming we would have a CPA preparing all the accounting reports. The attorney may have some other management responsibilities with the fund, but I think it wouldn't take up too much of his time. I could be wrong though since I'm new to this type of structure.. At first look if the attorney and I split 50/50 he would be getting the better deal since it would be more passive on his side. Does that make sense?
In a blind pool syndication, the 50/50 split between limited partners and general partner would probably only work if the money partners had a very high preferred return - like 12% annually. Otherwise, 20% to management is more common, with investors getting all their capital back first.
Bringing in the capital for this kind of syndication is worth 1/3 split of the managers share IMO.
How you divide profits with the attorney would have a lot to do with what the attorney is doing on an ongoing basis.
Is the cost of producing the PPM docs part of his contribution or is that taken from the general funds? Will the attorney handle the accounting and reporting to and managing the investors? Will any legal maters that come before the group be handled by him as part of his job as a manager or would it be billed separately? These types of questions can help decide what is a fair split long run.