Hello BP Forum Members:
My name is Barry Johnson and I am a relatively new Real Estate Investor. I have a long term business colleague that has expressed interest in being a Credit Partner as I carry out the day to day real estate analysis, work and heavy lifting. Can anyone help me with the following 3 questions:
1) What is the customary ROI usually paid to Credit Partners when their role is limited to ONLY being a Credit Partner (which I don't diminish because it is a huge role)?
2) Is there a "sort of customary or standard written agreement" regarding this type of business relationship?
3) Any suggestions on how you would structure the business relationship in this scenario?
first, I understand "credit partner" to mean you are going to be partners either with or without and entity but this person will sign any loans, bringing his good credit to the table. Second, I understand that you would then be bringing to the table Cash, Deals, property/project management, correct?
1) There is not a standard, but where it is not uncommon for an otherwise passive cash partner to get 50%, I would not expect a credit only partner to get 50% in most cases.
2) If you are operating through an entity where you are both owners, you should have an operating agreement for the entity. Hammer out key terms together and with an attorney.
3) Anytime you have joint ownership in mind, an entity with a clear operating agreement is a good idea. Again, talk to an attorney who works with real estate investors and partnerships.
Hi Doug: Thank you for your comments and input. Your understanding is correct and on point. We were actually attempting to hammer out the details of what the structure would be (i.e. whether we would establish a business entity (LLC) with operating agreement that laid out the terms of our arrangement OR whether we would just do a promissory note for the underlying debt (created by the credit he is providing) and then, within that promissory note we would also lay out the repayment terms and the ROI and exit strategy).
It seems we can accomplish our goals with using either scenario. In either case, we would definitely have an attorney memorialize our final agreement once we reached it. The Credit Partner's ONLY role is to make his GOOD CREDIT available for some up front operating capital and future real estate financing.
The R.E. Operating Company would be financially on the hook for all monthly repayment terms of the credit he provided and the Credit Partner also being entitled to receive 50% of all net profits on ALL real estate projects UNTIL such time that the underlying credit he provided has been repaid in FULL and then, additionally, maybe some type of negotiated Equity Kicker or pre-set buyout amount.
I was hoping to hear from the BP Forum on what typically works best (ROI & Structure) and standard (if any) exit strategies.
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