Limited Partnership Financing Guarantors

5 Replies

Hi BP-

I am the general partner as well as a minority limited partner in company I created to buy an asset. We bought 18 units in Lubbock, TX in 2018. The property is doing great and we are looking to pull some equity out through a refinance. For the original acquisition, I was able to solely guarantee the loan and keep my LPs off title and the note (as it should be). However, I have been shopping around my normal lending partners and they are all stating that due to the market conditions that they require any LP with 20%+ equity in the company to guarantee the loan. I have only increased my net worth and income since 2018, so this has nothing to do with my ability to guarantee. This is the exact opposite of what I was told and in-turn told my investors. They want no liability besides their original investment. 

My question is: Are other REIs experiencing this same shift in underwriting? Does anyone know a lender that still underwrites the same way as when I acquired the asset? Any feedback on experiences, workarounds or something that I'm missing is greatly appreciated. Stay safe and keep building those empires! 

It is very common for a lender to require anybody contributing more than 20%-25% in a deal to sign on the loan or at least go through the underwriting and background checks by the lender. I did a quick search and have found numerous posts going back at least to 2017 stating that. I wonder if your lender was at 25% when you closed on the deal in 2018 and is now at 20%. I always thought 20% was the standard which is why many syndicators put a contribution cap in their offering but I in my research I found that some lenders may go up to 25%. 

With covid and the tightening of the debt market it's possible that your lender is getting more conservative with their underwriting.

Good luck!

@Mack Benson

Thanks for the reply. The investor % has not changed since the company was created. My understanding from my lawyers and accountants was that difference between an LP and LLC (with partners) is that in an LP, the limited partners aren't required to be on a note or title, hence limiting their exposure to liability. With that lower risk they trade off most of the decision making to the GP. Now, obviously every structure can and is different. These were the general broad strokes as I understood them. If they do have to be on the note and subsequently the title what is the benefit from their (limited partners) stance? Like I said in the original post, for the acquisition this was no problem. They had to give their SSN for regulatory bodies to see where the cash came from but were not part of underwriting or on the note or title. I'm wondering if this a shift due to covid and current debt markets or a new requirement I should factor in going forward indefinitely.

Even if the investor is in the LP they could still be required to sign if if they provide more than 20% of the equity. This is at the lenders discretion and not part of the regulation so it could change due to the current environment. The offerings I have seen cap the contribution under 20% (closer to 15% of the total equity) so that the sponsor doesn't get in a position like you find yourself in today. It definitely sounds like a sticky situation. 

I would continue looking for a local lender who is willing to work with you but it may be difficult to find. You may even pose it as a condition during your negotiation if you explain the situation? Then again asking about it could raise red flags but if you explain it as a commitment you have to your investor maybe it could carry some weight.

Hey @Gordon Way I am here in Lubbock. What was said above is true. LLC VS LP has different signatory requirements but ultimately it is the decision of the individual lender. Who have you tried so far?? Let me know if you need local help and I can get you in contact with several Lubbock area lenders that understand investments.

@Mack Benson  

The things you learn when trying something new. The good news is we actually have great terms on the current note and are posing to sell in the next 12 months. I was looking into options to refinance in case the multifamily market softens in the area and we decided to hold for longer. Thanks for your explanation.

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