Thoughts on how to structure this deal?!

Rental Property Investor · Rochester, NH · Member since 2017 · 31 posts · 6 votes

I'm curious to hear how other investors would structure this deal/partnership...

Investor "Bob" finds the deal ($2M), negotiates the deal, completes all due diligence site visits, inspections, walkthroughs..etc. Bob also secures lender and financing. Bob is an experienced investor. Bob funds 50% of the down payment.

Investor "Jim" is a very high net worth ($50M+) individual with a network of other very high net worth individuals ($100M+) and funds 50% of the down payment. Jim takes on a 100% passive role.

What would be the appropriate equity split or compensation structure for Bob?

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Jeff CopelandBusiness Member

Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes

11mo

There's no single right answer to this question. It's completely negotiable between you and Jim, and depends on a lot of factors.

That being said, I would not expect "Bob" to have a massive preferential return or increased equity spit in this scenario.

My advice would be to not get wrapped up in the details of this single (presumably first?) deal with Jim.

Instead, focus on making it a home run and play the long game: 50% of this deal (+ building a relationship with Jim for multiple future deals) could put millions in your pocket over the next 5 to 50 years, and is almost certainly better than 100% of nothing.

To answer your question more specifically: One simple way to structure it is with an LLC with the two of you as members, and perhaps with you as the managing member (so you can sign for the LLC, commit funds, buy and sell assets, etc). Your LLC docs, particularly your operating agreement, will specify equity splits, profit splits, distribution timelines, holding periods, etc.

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Jeff CopelandBusiness Member
Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
11mo
There's no single right answer to this question. It's completely negotiable between you and Jim, and depends on a lot of factors.

That being said, I would not expect "Bob" to have a massive preferential return or increased equity spit in this scenario.

My advice would be to not get wrapped up in the details of this single (presumably first?) deal with Jim.

Instead, focus on making it a home run and play the long game: 50% of this deal (+ building a relationship with Jim for multiple future deals) could put millions in your pocket over the next 5 to 50 years, and is almost certainly better than 100% of nothing.
To answer your question more specifically: One simple way to structure it is with an LLC with the two of you as members, and perhaps with you as the managing member (so you can sign for the LLC, commit funds, buy and sell assets, etc). Your LLC docs, particularly your operating agreement, will specify equity splits, profit splits, distribution timelines, holding periods, etc.

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Brendan WinansBusiness Member
Real Estate Agent / Investor · Bakersfield, CA · Member since 2015 · 47 posts · 25 votes
11mo
There are a number of ways to structure this. I would say the most common for smaller operations would be a straight equity split with a premium for "Bob." Something like a 60/40 split in favor of Bob for doing 90% of the heavy lifting.

A common model in larger operations is the "Promote/Carried Interest" model. Bob earns a promote or carried interest for being the deal sponsor. Example: 8% preferred return to all investors (pro-rata), the profits are split 70/30 (Bob/Jim) until certain IRR or equity multiple is achieved (Could be 80/20 or 60/40 depending on risk, deal complexity, or value-add level).

You could also do something like a Fee + Equity model
It's highly unlikely that Jim would expect a 50/50 split. If he's intent on investing passively, he likely knows what to expect.
Hope this is helpful. I'd be interested to hear how Bob fares.

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Kate Nixon Taylor
Lender · Cary, NC · Member since 2021 · 122 posts · 29 votes
11mo
What does Bob want and what does Jim want right now? Cash or equity?
There are a lot of ways to structure this and there are some really great specifics above. I think it would be important for these two partners to discuss what their priorities are out of the deal. Does Bob need to be paid for his work since his time is being given to the project? Is he able to work for just equity and maybe Jim would prefer to make a percentage on his investment per month as passive income?
You will need to define the split for equity and cash flow based on inputs and what each investor wants. Both partners should come to the table with their goals and ideas around split and then find a situation where you are both getting mostly what you want.
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