Limited Partnership deal structure questions

8 Replies

So, I have a fair amount of experience investing in small multi-unit properties. I currently own a 5 unit, 1 triplex, 8 duplexes, 4 houses a 2 unit office building and I'm closing on a 12 unit apartment complex this week (turnaround deal). I buy with mostly no money down land contracts and then refi with a local bank. I currently have 9 properties with my bank and the 12 unit will put me at 7 currently on land contracts. I mention all this to say that I have experience and a track record of convincing sellers to work with me even with no money down.

Moving forward I want to focus on bigger deals. Sure there are still a few duplexes in my town that I'd like to own but it makes sense to me to go after bigger deals. Through targeted direct mail I am hoping to locate something around 20-60 units that is need of a turnaround.

Even if I am able to convince  a seller to hold all the financing I may want to bring in some partner(s) capital to be able to do the turn around faster and reach the refi or sell point quicker.

Let's say I am able to find a seller that was willing to sell on land contract and accept a $50k blanket note secured by the equity in some of my current bank-financed properties and like $10k in cash. Is it feasible to set up a limited partnership and raise $50k from the partner? I would keep 50% of the deal and 50% would be the partners. Just making up numbers. Whatever I wanted to raise in cash I would offer the seller the same amount in the form of a note on my stuff to keep the deal at 50/50 between me and the partners.

The plan would be to do a cash-out refi after forcing the value up on the property and then either hold it or sell it.  

I will be discussing limited partnerships with my attorney once I get my 12 unit deal mostly rehabbed. I'm just bouncing ideas around in my head now. Ideally I wouldn't be able to find a bigger deal that I could structure like all these little ones Ive done and avoid giving half my deal up.

I'm a full-time investor/painter.  I would probably hire 3rd party management but I would act as my own general contractor and I have a few people that would work alongside me in doing the rehabs.

Congrats, @Brandon Hicks ! You have more than most. Way to stick with it. I would probably establish an LLC with an operating agreement that is new investor-friendly. Probably create it with this one specific deal in mind, yet have a cookie-cutter Op Agreement where you can change the name and re-use in the future. I would discuss that with my attorney when we meet. Buy the building in the name of the LLC and allow your investors to purchase membership certificates. On a more important note, I would not buy on a land contract. Even if that is the prevailing form of seller financing in your area, it does not put the property into your name (or your entity name) until you pay it off or refi. In the meantime the seller could get into trouble and get a lien attached to it. Here we use a note and deed of trust or a Real Estate Contract. In both cases, the title transfers to the buyer upon closing.

Thanks for the info @Steve Vaughan . I currently own all my properties through a LLC. Would my LLC be able to be a part-owner in the new LLC? I'll discuss the pros and cons between a LLC vs. LLP with my attorney.

I guess my thoughts (and I could be partly wrong) is that I would be better off with a LLP. I would act as the general partner and be in driver seat while the partners would be "silent" and only be putting their money invested at risk. I was in a partnership with 4 others owning a real estate office and I didn't enjoy it. At all.

Isnt this a major difference between LLC and LLP?

Sorry, I don't know much about LLPs @Brandon Hicks . I do know I wouldn't blend my current LLC into a new property with new partners. I would set up a separate one for that property and for every subsequent property that involves new or different partners. Keeps things cleaner.

@Brandon Hicks 

This is good stuff. The difference between LP (LLP are for attorneys) and LLC are best summarized in this article.   

For the size of deal that you are looking to get into, I'm assuming that you will have a good relationship with your investor - I have several large investments both held in LP and LLC and they both work fine.

I'm sure your attorney can guide you in choosing the right format once you provide specifics on the deal, strategy, etc.  From my experience, here are some additional things you should consider:

- what is your strategy with this investor? One time investment deal? Or Long term? The vesting (joint tenancy vs TIC) on the property has HUGE impacts on whether you can split proceeds up at the end or must keep the company together (in order to avoid capital gain taxes).

- will your investor want to be an active investor or completely silent? If he wants to be active (or if it is not your family/close friends). Don't quote me on this, but an LLC may be more suitable due to the legal structure it offers in case things go awry. If it's a close friends with high trust, an LP has less formalities to deal with.

- there are additional costs associated with having an LLC (at least in California where I am)

As to your comment on holding the multiple properties under one LLCs, I think that would be fine if you are the sole owner of these properties, but since you are looking to get into bigger properties, it may be worthwhile to just start with a new entity.  The reason being:

- liability - if something goes wrong with your investment, your other parties are insulated and are not at risk.

- separation of books/finances/accounting - seems a lot more clean cut with its own entity

Thanks @Jason Mak, Ill check out the article.

To clarify, all of MY properties are held in a single LLC.

The deal I would be proposing would be a single property (most likely) held in its own entity.

I guess my main question is can my LLC be a partner in this new LP? The reason being is that I really have no assets (personally) so my proposed contribution is a blanket 2nd mortgage I would give the seller on properties that are already owned by my LLC and financed with my local bank (not land contract deals).

I would really only be interested in non-active partners.

If the deal went well I would be open to doing more like it with the same or different investors.

Brandon, yes, your LLC may become a limited partner or a member of another LLC, just as you can, it is a legal entity.

I'd suggest your LLC go into another LLC with its contributions of equity and your new partner bringing in cash.

Having non-liquid assets means pledging the assets, this is not a DIY thing for you to try to do, get a corporate attorney, familiar with subsidiary and affiliate entities.

You have a lot of bases to cover in the Operating Agreement, buy-sell agreement, removal of officers/members, pledged assets, accounting of profits, hold harmless between members, insurance loss proceeds, cut-off amounts for disbursing funds and creating liabilities......have your attorney address these as well as other aspects.

I don't know if you have a Series LLC available to you, if so, look to those as your assets may be better protected. Again, see your attorney as well as your accountant. Good luck :)

You also need to analyze how you are going to structure the transaction from a tax perspective.  If you intent to sell the current property and then "cash out" and pay the taxes, there is no real planning needed.  However, if you intend to structure 1031 Exchange into the new investment property, there could be some significant issues with some of the ideas discussed above. 

Your current ownership is an LLC, which sounds like it is a single member LLC (i.e., a disregarded entity) for tax purposes. This means that it is treated as if it is owned directly by you for tax purposes. If you acquire your new investment property in a LP, LLP or multiple member LLC, then you have effectively acquired the new property in another taxpaying entity, which will not qualify for your 1031 Exchange. So, tax planning may be in order here. I would bring this issue up with your attorney as well.

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