Investor · Lansing, MI · Member since 2021 · 55 posts · 22 votes
Hello,
I have a few questions about acquiring projects with different partnership structures.
I know a common practice (at least for syndications), is to create a separate LLC for the property and then raise capital once the deal is already under contract. How does everyone go about getting the property under contract before that? Do most people get the property under contract in a single-member LLC and then assign the contract to the syndication LLC during the DD period? Going along with this, is this different if you're acquiring a smaller deal with just a singular partner?
Would love to hear some input from the GPs out there on the most efficient way to do this.
I get into contract in my operating company and then assign the contract to the new LLC prior to closing. There is a provision in all my contracts that permit me to assign the contract to a newly-formed entity that I control. It's a common practice and I've never had any opposition to this provision.
If you don’t have an operating company, you could get into contract in your own name and then assign it. Consult with competent legal counsel to guide you regardless of your choice here.
I get into contract in my operating company and then assign the contract to the new LLC prior to closing. There is a provision in all my contracts that permit me to assign the contract to a newly-formed entity that I control. It's a common practice and I've never had any opposition to this provision.
If you don’t have an operating company, you could get into contract in your own name and then assign it. Consult with competent legal counsel to guide you regardless of your choice here.
@Gabe Goudreau how big of a deal are we talking about here? One of my clients had a $1M deal under contract where they needed to do a $300k raise. A syndication was way overkill because there were only 5 capital partners so they customized an operating agreement with their attorney that outlined roles and responsibilities, distributions, membership interests, etc.
And you don't have to have all this stuff figured out right now; it's very customary for us to assign the contract to whatever customized entity we end up forming.
Just one caveat. Make sure you know where the guard rails are with your bank. If you give someone over 19% membership interest in the deal, the bank will usually require a personal guarantee from that individual. If they are the one providing most of the cash, they might not want to carry that liability, but you've already negotiated with your partners on this and then the bank isn't cool with it, you could be in a pickle.
@Gabe Goudreau how big of a deal are we talking about here? One of my clients had a $1M deal under contract where they needed to do a $300k raise. A syndication was way overkill because there were only 5 capital partners so they customized an operating agreement with their attorney that outlined roles and responsibilities, distributions, membership interests, etc.
And you don't have to have all this stuff figured out right now; it's very customary for us to assign the contract to whatever customized entity we end up forming.
Just one caveat. Make sure you know where the guard rails are with your bank. If you give someone over 19% membership interest in the deal, the bank will usually require a personal guarantee from that individual. If they are the one providing most of the cash, they might not want to carry that liability, but you've already negotiated with your partners on this and then the bank isn't cool with it, you could be in a pickle.
The one I'm looking at right now is a smaller 8-unit project - only around a $100-125k equity raise + loan guarantee. Not a ton of value-add opportunity, more of a core+ investment in a very small market I'm familiar with - my initial analysis is yielding a 14% IRR & 1.28 EM, so I'm not sure of the attractiveness to investors. I still need to do a deeper dive, but the ownership structure was one of the external factors that I was thinking about.