How to structure a multi famil deal

Question

Diana Muresan · Answer

I see, so if you are the only one on the loan, you will need to season the funds to close for at least one month, Freddie will allow just 1 month bank statement where Fannie requires 2 months. On an investment property funds to close can only come from the borrowers and gifts are not allowed, so you will not be able to use the funds from your partners unless you deposit them in a joint account and season them

Diana Muresan · Answer

I don't have advice on how to share the profit as I am just a lender :-) Question though, how many people will be on the loan since there are 4 investors?

Juan Vargas · Answer

@Shmuel Waldman We would need more information regarding the deal. Sounds like this is a partnership and not a security? What is everyone bringing to the table besides equal capital? Who’s overseeing the property? Local partners?

Theo Hicks · Answer

Since they are just investing and have no other responsibilities, you will need to do a syndication and work with an attorney. A typical syndication offers a preferred return to the LP (i.e., the investors) and a profit split of 50/50 to 70/30 (LP/GP). In this case, you would be the GP and have 25% of the LP share, while the three other investors have 25% of the LP share each.

Ray Johnson · Answer

@Shmuel Waldman In my experience partnership splits are determined by the size of the deal, a 6 unit deal is going to have a different profit split structure than a 60 unit deal which will be different from a 600 unit deal, What size deal is this going to be?

If it's a small deal, A fair way to structure the profit splits will depend on a few other things, If all four (4) partners are bringing in the same amount of equity (6.25%), at that point the profit split is simple (25% each), It's what's happening with the other responsibilities of the deal that would determine additional profit splits for any given partner.

1) You mentioned that you're getting the loan yourself, Are you being compensated for assuming this additional risk on the deal?

2) Who found the deal? Is that partner being compensated for doing the research and analysis for discovering this deal and bringing it to the partnership?

3) Who's managing the deal and the partnership? Is that partner being compensated for managing the deal?

4) What's the exit strategy for this deal? Holding for a short-term 5 years or less then sell and split profit, refi and cash out partners at some point and the LLC maintains the property, etc... these different scenarios will yield very different profit splits.

A good partnership agreement will outline these responsibilities in addition to many more, these responsibilities can have value assigned to them, if this is your first partnership deal, keep it simple so these partners will brag about the great deal to other investors increasing your pool of investors.

Todd Dexheimer · Answer

You are selling a security, since the investors are completely passive. You should be going through securities attorney and doing a 506 type offering, which is what most syndicators are doing. The most common split offered is a 70/30 split (70 to the investors, with you cash being treated as an investor), 2% asset management fee to you based on collected revenue, 2% acquisition fee to you at closing based on purchase. We usually also see a 7-8% preferred return, meaning the investors are paid the first 7-8% and then the profit is split 70/30.

Setting it up like this should get the limited partners shares just below 20%, which will help with the lender not requiring them to personally guarantee.

Diana Muresan · Answer

@Shmuel Waldman. You are very welcome.

How to structure a multi famil deal

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