How To Structure This Investment Partnership

11 Replies

Two investors are buying a warehouse. One investor is investing 1.3M cash and the other got approved to put in the remaining 1.3m through a hard money lender. The loan is secured by a first trust deed against the property. The term is 12 mos with a balloon payment at the end of the 12 months. The broker who found the loan swears she can find another loan with better terms during those 12 months to avoid the balloon payment.

How do you structure this so it’s fair to investor #1 who put it in their own cash?

50/50 split is okay, but you may need to have a more detailed discussion with your CPA and attorney on this investment. The cash investor's money could have been leveraged into other assets. Consider the time value of money for leveraging cash in real estate and cash-on-cash return as his opportunity cost when he invests in this deal. If we split it 50/50 even, then the non-cash investor is having the same benefits of income and depreciation write-offs, but not having to put any money in up front. Even though that person is liable for the other half of the purchase, it's paid over the life of the mortgage/loan as the property generates revenue. Because of this, you may choose a special election for the partnership to allocate more depreciation write-offs and/or income to the cash provider. Also consider who will be managing the property as a variable in determining profit splits.

Originally posted by @Bridget Ariel :

Two investors are buying a warehouse. One investor is investing 1.3M cash and the other got approved to put in the remaining 1.3m through a hard money lender. The loan is secured by a first trust deed against the property. The term is 12 mos with a balloon payment at the end of the 12 months. The broker who found the loan swears she can find another loan with better terms during those 12 months to avoid the balloon payment. 

How do you structure this so it’s fair to investor #1 who put it in their own cash?

This really doesn't make any sense, If one investor has 50% of the cash they can just go to the bank and get a very low interest loan. No need for partners or hard money.

Second I would not invest 50% of the cash and then allow a hard money lender take a first lien position on the property.

@Bridget Ariel

Yea..you dont want the property used as collateral for his loan...

If he can't pay, you lose the property...

Also - do you have this ownership within an entity or as tenants in common?

The owner wants 2.6m cash, zero contingencies and sold as is. What if investor#2 defaults on the loan and investor#1 buys his debt and continues to pay off the loan? investor#1 will get the property at a discounted rate assuming investor #2 stays for at least 1 year?

Investor#2 is the current tenant and has been running a business from the property and paying 11/000 rent per month and has a NNN lease. The other investor is my family putting up the cash. Unfortunately, no banks will loan money on the property because the land is contaminated. Most of the buildings in this area have some level of contamination. It's a booming area. I've watched the property for the last 8 years go from 800k to now 2.6m and they already have four cash offers from investors according to the owner and realtor. The owner said he prefers to sell to the tenant. I was hoping to make this work for both parties and minimize the risk for the investor putting up the 1M+ cash

This sounds very complicated. I don't think you're going to find an equitable solution in a paragraph or two online. I would add more contingencies and different profit shifts for net income to benefit the Investor #1 while #2 can still bank a small amount of equity with each payment.

I would proceed with caution here.  A few red flags for me:

1) Relying on the broker "swearing" she can find new financing a year down the road. It would be prudent to look at what can go wrong when the balloon payment is due. At the very least you the partners should discuss what happens if no additional financing is available at the the note is due. (You mentioned traditional banks may not lend because of Environmental issues).

2) The fact that there is more cash in this deal makes it more attractive for a lender to foreclose in the event that the balloon payment cant be met through re-financing.  

3) It would be well worth the cost of a ESA report for both partners to understand the environmental issues with the property.  These will for sure affect the future value and ability to exit and/or realize any returns.

TIC (tenants in common) is probably the safest thing for the cash investor to protect his part of the ownership in case the hard money lender takes over his partner for defaulting on the loan.

@Bridget Ariel Why is partner #2 getting any part of the deal if he isn't bringing any cash to the table? On top of that partner #2 loan is only secured against the cash that partner #1 down. This doesn't make much sense to me. In my opinion partner #1 should maybe give partner #2 a finders fee for the hard money loan and take the deal for himself.

Am I missing something here?