Partner Split

8 Replies

I am trying to get an idea of a fair split for an apartment complex deal that is currently in negotiation.  Without going into great detail, there are essentially two parties: the managing partners, and the money partners.

The managing partners' LLC found, negotiated, and while not directly managing the property, will manage the PM. They are investing 10% of the cash and will be holding a recourse loan.

The money partners are putting up 90% of the cash. They will not be on the loan, nor be involved in operations.

The deal is set up so that there are two splits: one for the cash flow, and one for the proceeds at sale. What would be considered fair numbers? Essentially, how much are the managing partners non-monetary contributions worth?

80% of the profits (cash flow & cap gains) goes to the passive investors.

20% goes to the sponsor.

Sponsor also gets 1.5% of gross rent as asset management fee.

the first question I would ask (based on absolutely no similar experience) would be:

What would you pay a bank to borrow the same capital? 6%? 7%? I would think your investors would want to earn at least a similar if not higher return than the bank would.

as for equity split I have no idea. 

A couple of different perspectives on this, interesting.  I was also thinking 80/20 in this case. An additional 10% goes to the sponsor for their work.

@Nathan E. , in your example a sponsor would get 28% in the case of 80/20 split.
E.g. for each $1 of profit a sponsor gets 20c for being a sponsor and 8c (10% of 80c available for passives) for providing 10% of the down payment.

Since this is being done within an LLC (as it should), and since there are different classes of membership interests (2 that I can ascertain), there are multiple factors to work out, some of which apply even when there's just one class of membership interest:

How initial capital contributions, for each given class, are booked.

How subsequent capital contributions, if any, for each given class, are booked.

How member loans are booked.

How each member's capital account will be handled pursuant to Treasury Regulation §1.704-1(b)(2)(iv), and how reevaluation of said accounts will take place per Treasury Regulation §1.704-1(b)(2)(iv)(f), to conform with §1.704-1(b)(2)(iv)(g).

How distributions will be allocated, including profits and losses, along with any resulting adjustment of percentage interests.

How tax allocations will be handled - and if the book value of any company property is adjusted per Treasury Regulation §1.704-3, how that affects member allocations.

I have not even covered every item that must be addressed (including voting rights, depreciation allocation, cash flow vs liquidation allocations (as in "when we sell a property - who gets how much of the appreciation, but what about the recapture, etc, etc.")).

Insufficient information... and it's time to meet my wife for dinner.

@Nick B.

 Thanks for the clarification. The first 20% goes to the sponsor, the remainder is divvied up by % of investment.

@Lew Payne  

Thanks for pointing this out.  All of these things will have to be ironed out before closing.  I'd love to learn more about structuring deals of this sort.  Besides the treasury regulations you mentioned, do you have any good source of reference information?

Originally posted by :

@Lew Payne 

Thanks for pointing this out.  All of these things will have to be ironed out before closing.  I'd love to learn more about structuring deals of this sort.  Besides the treasury regulations you mentioned, do you have any good source of reference information?

I don't see how you're going to "iron things out" at the closing, when doing so requires a fair amount of negotiation and meeting with partners, as well as the requisite legal work.  It's like telling someone "we'll work out the terms of your Will right before a fatal accident."

http://jamespublishing.com/shop/the-limited-liabil...

That's one of the sources I use to draft LLC agreements.

Depends on the deal and your investors needs.  If your investors are more inclined to opt for cash flow today you can consider some sort of a preferred return on their investment allowing yourself to have more upside on the back end.  

Whatever you do, I would suggest a hurdle where if you achieve X% return on investment then all dollars after that are split at a more sponsor friendly split.

I do agree with Lew that you are better off getting ahead of the conversation on the arrangement now rather than later.

Best of luck!