How do I structure this deal - 2 scenarios

8 Replies

Hi everyone, I'm new to this site, and I consider myself a new investor.  

I have 2 properties in Seattle.  One I split into 2 separate 2 bedroom units, the other is a houseboat and I negotiated seller financing.  

I've been a landlord for 10+ years.  I've done most of the work myself, or worked with contractors to do fixes, remodeling, rehabbing, etc.  I have directly managed tenants, and I've worked with AirBnB, and property management companies.  

I'm now in New York City / Brooklyn.  

My day job is a tech startup entrepreneur.  Currently I don't have funding for another property, and don't have cash to put down on a seller financed deal.  But, I have a business that has a community of other entrepreneurs who need a place to live and work, both short term and long term stays, and I have a waiting list.  Instead of renting spaces, for obvious reasons I want to buy.  This is a business I want to start in NYC and expand to other locations, buying multiple properties to do the same thing.  

I have 2 situations on the table for a property in NYC.  

Scenario 1: 

Company A has done this type of housing before, has 2-3 years experience, a semi-known brand in the space, and also has a list of potential tenants.  They are based in San Francisco and would like to expand.  

They do not have money to invest right now.  They offered me 25% cashflow and no equity in the building (if/when purchased), and no equity in the parent company, unless I gave them my business then I would vest to 1% after 4 years in theirs, current valuation approximately $2 million.  

Additionally I am tasked with doing all of the legwork on the ground - finding the space, putting in offers, etc. 

Scenario 2: 

Company B has cash to buy a property.  The want a 6% return cashflow.  They are interested in my business because they don't have to do any of the work.  I maintain the space, I find tenants, etc.  

They asked for equity in my business.  I said yes, but that I also wanted equity in the building in exchange for acting as the operator - I am out finding and viewing and vetting properties and would be involved in any construction.  

They asked why I would want a percentage equity in the property and don't seem to want to JV.

Summary: 

I have a JV/LLC opportunity to give a solid return and I'm doing the legwork. But I'm not sure that either is a good deal. I would like to counter with a sensible offer but I'm not 100% sure how to structure it.

Do we create an LLC for the entire project and become co-owners in both the business and the property?

If I have no upside in the building, i.e. no equity, why would I not just rent (and pay less than 6%) until I buy a property with my own money?  

For obvious reasons I prefer to buy.  I have 4 years experience living and subletting in this market in NYC.  I have local contacts including real estate agents and contractors.  

Does anyone have any advice on how to structure this?  Am I just not explaining the deal right or am I not talking to the right people?  Or am I way off? 

Thank you so much.  I've been banging my head on the wall for many months trying to figure this out.  

Appreciate any insights! 

Libby 

you should look into promote structures. Typical structure for real estate private equity structuring. 

http://www.pircher.com/media/publication/50_SACArt...

I would recommend a newly created Llc holding company own the property. Both you and your equity parter will have an ownership interest in the holding co. The you can just set up payout ratios/hurdles per your ownership agreement. Set it up so you both get paid out a certain about during the operation and and if you meet certain return threshold, you get a higher percentage of the excess returns.

Don't look at it like you want equity in the building. Look at it more like you want equity in the investment company that owns the building. 

Hi Libby.  Why not approach building owners with this proposal?  There are a number of properties in Brooklyn and Manhattan that need gut rehabs.  For an equity interest in the property, you can do all the work, tenant the property, and share the proceeds with the owner.  

Thanks, good ideas.   

@Bob Thomas  - I agree, an overall investment co. 

@rfplevy - How can I find the building owner?  

Do not do the company A deal.  A 1% stake in a small business (eventually, 4yrs down the road- yeah!) is worthless.  Most of the time a less than 51% stake in small business is worthless.  They can vote you out or vote not to send any distributions your way.

I agree with NA Plevy

@Libby Tucker: A good way to find properties applicable to your intended use is through a  broker.  You mentioned you had contacts in this regard.  You can also do a search for buildings on streeteasy.com and even set up an alert to receive an email anytime a new building comes on the market.  

If you find a property on your own that you're curious about,  ownership records (along with lien information) can be found on http://a836-acris.nyc.gov/CP/.  It is free to register an account.  Happy hunting.  

Thanks!  I just found the website to search, though I don't see owner names, but I'm sure it's just a matter of digging deeper.  Yes, I do have broker contacts, I didn't think to ask them and many represent the property management co it seems.  I will keep digging in this direction, thanks!  

This is probably a dumb follow up question, but, I see the owner's name.  What's the best way to get contact info?  

Also - another follow up question. Assuming I get a hold of the building owner. I tell them about what I'm planning to do. How do I structure this? Same as creating LLC holding company as in earlier response from Bob?

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