Private lending- single investor: legal issues?

Question

Account Closed · Answer

@Mark Schmidt, there is no simple answer to this question. I would be happy to discuss potential solutions with you. Feel free to PM, email or call my office. Thanks.

George Skidis · Answer

All sides need competent legal representation. The investor friend probably has his already. You and your other friends will probably need to sign a personal guarantee as well.

Seen too many friend deals go wrong over the years. Is this one good enough to help your friendship survive?

Doug Smith · Answer

Gotcha. Sorry for the misunderstanding. In that case, we just use at Operating Agreement for the entity (the JV), which would be an LLC with the investor and then us having a token $100 ownership for tax purposes and then a Management Agreement between the JV and your "management company". The management agreement details our compensation, duties, powers, investment parameters, and most importantly how we agree to unwind things if the parties grow unhappy with the relationship. We typically take a specified percentage of the Assets as a management fee (2%-3.5% depending on the JV size) plus 20% - 50% of the profit depending upon the deal size. The positive to this is that, if the deal goes South, it's an equity relationship where the losses are on the investor and they can't come back against you unless you were grossly negligent or committing fraud of some sort. The negative is that you might be giving up profits that you would normally get if you were borrowing. We like the JV setup and use it a lot with larger investors. Again, I don't know Illinois law, so you'll want to chat with an attorney that is familiar with JVs. Good luck!

Doug Smith · Answer

Edwardsville! I grew up on a farm about 60 miles North of you! That being said, we don't do business in Illinois, so I would double check this with a local attorney friend that you might have that has experience in Joint Ventures. If you are only working with the one investor, it sounds as if a JV (joint venture) is all you would need. In situations like this, we typically set up as LLC to hold the assets with the investor as the primary, but passive, owner with us having a small, token ownership ($100). We then have a management agreement (separate document) between our firm and the JV entity for us to manage the JV entity. It outlays our powers, investment parameters, our compensation for managing, etc. With only the one investor, I don't think you would need a PPM, but I am unfamiliar with Illinois law. Illinois regulatory law is quite onerous, so certainly chat with your attorney. Regarding your investment strategy, am I reading it right that you will be lending? With lending, we tend to stay away from consumer lending and we stick with commercial lending. There is less regulation and licensing requirements. Let me know if you have more questions. I'm happy to help.