Structuring an LLC with private money lender

5 Replies

Hi everyone,

We are working on our first deal and after sitting on the sidelines for a while and reading all thing BP, we are very excited to have our first offer accepted!  

We are looking for advice on how to structure the new LLC we are forming with our private lender. The private lender is providing the cash needed for the down payment and we are putting in the sweat equity. Do you suggest making the lender an owner in the LLC's Operating Agreement or do you suggest treating the lender as a bank and asking for the money up front so the cash sits in the hands of the LLC and the lender is treated as a bank? We attempted the first scenario but we have run into many issues where the lender has had to have his credit checked many times and is constantly being bothered by the bank since he is the source of the money. This has not left the lender too happy with the deal so far so we are looking for other options.

Thanks for any help you can provide!

Nick.

Treat the lender as a bank and ask for the money up front so the cash sits in the hands of the LLC and the lender is treated as a bank. Then put the lender in 1st position on the property as a lien holder.

That will protect their funds and give you full control over their cash to invest it wisely. Do not make them a member of your LLC, that creates more paperwork.

Thanks so much @Antoine Martel !  This is really helpful insight. 

Just a couple quick questions.  In regards to putting the private lender in 1st position on the property as a lien holder, can we still do this if the private lender (I probably should have used the word investor) is not fronting the cash for the entire property but instead the amount needed for the down payment?  We will still be using a mortgage to finance the remainder of the property. 

Also, do we need to let the money sit in the LLC's account for a certain period of time before we are good to move forward? Curious if the bank providing the mortgage will need proof it has been there for a certain period of time.

Originally posted by @Nick Marshall :

Thanks so much @Antoine Martel!  This is really helpful insight. 

Just a couple quick questions.  In regards to putting the private lender in 1st position on the property as a lien holder, can we still do this if the private lender (I probably should have used the word investor) is not fronting the cash for the entire property but instead the amount needed for the down payment?  We will still be using a mortgage to finance the remainder of the property. 

Also, do we need to let the money sit in the LLC's account for a certain period of time before we are good to move forward? Curious if the bank providing the mortgage will need proof it has been there for a certain period of time.

 Yes you can still do this.

You can put anyone a leinholder on a property. 

You do not need proof of funds for a specific amount of time. 

This is going to be difficult to structure and satisfy a lender. Your investor is putting in all the cash equity, so I don't see how he can avoid the personal guarantee. That means not only credit check, but personal financial statement and copies of tax returns. I have seen some structures with two classes of ownership, one voting and the other non-voting. Most of the equity comes in from the non-voting, and they aren't required to guarantee. But they have no say in running the business. Voting members should have at least a token cash contribution, but will have to personally guarantee. It then becomes a question of personal financial standing and goes into the credit decision mix, along with LTV, collateral, management experience, cash flow, etc. As far as sourcing the cash, lenders like to see at least a few months bank statements.

Hi, Nick @Nick Marshall : Here is what I see after reading your post. 1) You cannot put the private lender (or investor) in 1st lien, because you will need more money from regular bank, which will require to be 1st lien holder; 2) If the private lender is not on the lien, and not part of the LLC, who would give you upfront money without securing it? (Most, if not all, private lenders would not do that). To make everybody happy, I would partner with the private lender in the LLC, treat the private lender as bank, IF he can fund the whole project without going to another bank. Good luck.

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