Opportunity Fund Ownership Structure

14 Replies

Myself and my friend both have some Capital Gains we'd like to defer into an opportunity fund to self invest.  He is going to be a more passive investor in this situation.  I'll be the one getting the deals, renovating, and everything else.  How would you structure the owner ship structure.  We're each bringing the same amount to the table as far as our capital gains.  Should we be doing an even split and then me taking a percentage of net fee for managing the projects?  We will be paying a property management company.  I guess what would you do?

I'm curious what everyone thinks as I'm been trying to find an answer myself.  My understanding is that contributions in kind aren't going to be subject to the stepped up basis so extra equity for managing and/or syndicating may not be any different than an ordinary deal

your question is a bit vague, so there is 2 of you, both using your capital gains as capital for an active investment deal you both with have your hands in? who will be doing what exactly and break down the % on active participation. for instance if you are Asset manager and he just lends his half of the money then put him on a 70/30 equity split or pay him 10% pref. there is a lot that can go into this question

@Justin Kane pretty simple. He’s just investing. No participation besides putting his money in the fund. I’ll be doing everything. 

Cool then yea i would just put him on a preferred return simple interest loan, 6-10% interest only for 2 years with balloon I would start at 6% since its low risk at 50% if he puts in 75% give him 8% option and 100% at 10% option etc.

@Justin Kane Because it's an opportunity fund I don't think I could do a loan and pay him back.  Not really sure thats how it works.  He'd be losing tax benefits by doing that, wouldn't he?

Originally posted by @Cody DeLong :

@Justin Kane Because it's an opportunity fund I don't think I could do a loan and pay him back.  Not really sure thats how it works.  He'd be losing tax benefits by doing that, wouldn't he?

 You could give him a "preferred equity interest" in the partnership as opposed to it being debt and they could still get the benefit that QOFs offer. To do that, you'd need to set up the waterfall/allocations to be something like the following: 

1. Return of Preferred Capital 

2. Preferred Return (i.e., whatever percentage you determine is best) 

3. Your Return of Capital (we'll call your interest common)  

4. Preferred gets X% of profits; common gets Y% of profits. 

This is one way to do it, but I don't think I'd structure it this way. I see preferred interests most of the time where one partner is bringing in the majority of the cash. In your situation, you are both bringing in equal amounts. Further, it sounds like you'll be doing most of the work in regards to finding deals. There are a few considerations to think about in regards to the services you are providing: 

Will you need/want the cash for your services immediately? If that's the case, then you can just put a number on it (i.e., X amount per deal or X amount per hour) and it can be paid out annually in the form of guaranteed payments. 

An alternate approach would be for you to take additional "back-end" upside that occurs as profits are generated or as your properties appreciate in value (and you monetize that appreciation). In the waterfall above, you'd essentially both share in the first tier the same (i.e., return of capital), you'd remove the preferred return tier and then in the last tier you'd take a larger percentage than your buddy since you will be providing more services. 

@Cody DeLong

Opportunity Zones are still sort of the wild west right now. There are a few funds that have been created, but it seems like no one wants to be the first player to really dive in, since there's still uncertainty on the regulations. I'd be interested to learn what you hear about this as well. Seems like it could be a great way to build a fund with older/passive investors looking for a tax shelter on their gains. 

@Will Hodges I do not need the money instantly.  I think i'm just wondering, is it possible to make it a 70/30 partnership even if we're both bringing in the same amount of money?  My other business we all invested the same amount of cash when we started 8 years ago so its all been split evenly after salaries

@Cody DeLong You can create any type of arrangement you want so long as the other party agrees to it. Partnerships are extremely flexible when it comes to the sharing of economics. If you are bringing more by way of value in services, then it’s not a hard argument to make that you should be reaping more of the benefit. Now is that 70/30 or some other type of arrangement, that’s a question you and your partner will have to decide. 

@Will Hodges also to clarify on my k1 I have an amount listed under ordinary business income which is my portion of the companies profits for the year. This is the amount of the unrealized capital gains? I have nothing under net capital gains because I sold no stock.

No, ordinary business income from a K-1 isn't capital gain and won't be eligible for the QOF exception. In addition to selling equity, the other way that you could get capital gains is if the entity you are invested in sold property that generated capital gain and these amounts were allocated to you on the K-1. 

What if you kept it simple and did a 50/50 partnership and then collect a management fee from the LLC for your work? Your contributions in time and labor will vary over the years. Maybe one day he will take a more active role when you are busy. Management fees will adjust for this.

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