Loan/Deal Structures With Partners

[Jeremy Vaughn]

In an article like this: https://www.biggerpockets.com/renewsblog/2014/03/1...

The author says "Let’s say you structured the deal such that the investors get 75% of the building and you gave yourself 25% for putting the whole thing together."

I'm assuming he is basing these numbers off of the investors putting up the whole $180,000 down payment?

How is the $420,000 mortgage typically structured? Is the loan made to the LLC and the LLC has a PPM that details what each investors percentage is?

Does anyone have an example of a LLC operating agreement or Private Placement Memorandum that I could use?

Who would I go to for help with the structure of the deal? Attorney/Lender?

[Jonathan Twombly]

@Jeremy Vaughn

There are many different ways to structure these deals, but here's how we've done it on our deals. The property is actually purchased by an LLC, which owns the property. The equity investors receive LLC membership interests in proportion to their equity stakes. We denote these as "A" shares, which are entitled to share in the preferred return, and the portion of the return over that not going to the "B" shares. The sponsor receives B shares representing its "promoted interest," or the 25% in the example above. (It need not be 25%.) It is possible for you to have both A shares and B shares - A shares if you put any cash into the deal and B shares to represent your promoted interest as the sponsor.

The LLC is actually the borrower.  However, some person or persons must sign on the mortgage.  Usually this is the sponsor or the partners within the sponsorship group.  To qualify for a commercial mortgage, lenders will typically require all the signatories' combined net worth to be equal or greater than the balance of the loan, with 10% of that in cash.  The loan should be non-recourse, but typically comes with "bad-boy" carve-outs, which transform the loan into a recourse loan if any of the carve-outs are triggered.  The carve-outs typically concern fraudulent behavior on the part of the sponsor.

The co-signers on the loan can be sponsor/partners, investors, or unrelated people who you compensate to "borrow" their balance-sheet.