How to write this private lending agreement?

Question

Hi All,

I'm newbie here not sure if this is the right board to ask this question.

I planned to do the rehab business(buy from truestee sale) for a while, but just short of cash, recently I'm lucky enough convinced a friend to lend me $200k( with my own $100k) to start my rehab business. I proposed 40% as loaned money(no interest :-) ), and 60% as investment money. I gave my friend projected return of each investment flipper generates 20% profit, and 3 projects a year. So total projected return will be about $200k + $72k(60%on $120k).

Now we agree on putting together a gentleman's agreement together. Wonder is there such an existing agreement out there? or can i use a promissory note? 
 
Thanks!

Bryan Hancock · Answer

I'm not sure that a promissory note will work very well.  Each party will want to have their investment secured and a promissory note work fit well there.  Even if you could secure it who would be in first position?

It seems to me like you guys should set up a simple LLC for this with an operating agreement that specifies what happens, who votes, etc.  I know this sounds simple, but even the best of friends can be at each other's throats over money if things don't go as planned.

If you insist on avoiding a new entity you should draft a joint venture agreement and file a D/B/A.  Note that this won't shield you from liability unless that JV is between your legal entities.  The legal entities will then be exposed to the other entities though.

Spend a few bucks on a lawyer to draft a simple LLC.  An ounce of prevention and planning is worth two megatons of cure if things go bad....and they will eventually unless things are well-documented.

Bill Gulley · Answer

Hi, I have to agree with Bryan and Charles. You really do need an LLC. Your friend needs to loan the LLC the money and make his contribution to capital in his account and you do the same with yours. How you work out the split on profits will be in the Operating Agreement. 
          
          The other issue you mentioned was claiming a 20% return for him, wording your deal that way will likely cause problems, he may expect 20% when you don't make 20%, and chances are very good you won't on every deal.
          
          In your operating agreement, you need to agree to a split on the profits and that amount should be disbused to each partner's capital account, respectively.
          
          Loans can be accomplished several ways, but he needs to make a personal loan as an individual to the LLC and you sign the note as a borrower under your capital account. In the Operating Agreement you need to make the provision that each member is personally obligated for recourse debt created by them to their separate capital account. If any collateral is pledged for such a loan it need not be LLC property and it is secured by a UCC filing for personal property. This gives each of you the authority to borrow money in your own accounts and be personally responsible for the debt and not the debt of the entire LLC. You need to see an attorney to draft this. 
          You have about 300K in play, spending 2 or 3 K for a good attorney is a cost of doing business, so I strongly suggest you do get an attorney to draft the agreement.
          
          Like Bryan was leading to, there are no friends in business transactions. If there are in the beginning, I guarantee there will not be at the end. Write down what you want to accomplish, don't make promises about how much you will make, agree to the split and how profit  is determined and who is responsible for expenses. Get your suggestions and the information you gather and make an appointment with an attorney! Good luck, Bill
          
          Bryan, good post guy, had to vote you up on that one! Good job!  Bill

Edwin Brown · Answer

$1000 with a decent attorney will save you hours of stress and the potential loss of a friend. I learned that one the hard way.

Account Closed · Answer

Richard,

It depends on how you are structuring this.  Is your friend loaning the money long term or is this more a transactional deal?  Sounds like a long term arrangement.  How involved does your friend want to be?  I'm assuming that your primary investment in the deals is your experience and some capital.

Anytime someone loans money a promissory not should be drawn up as to the terms of the arrangement.  With at least some basic information.  Interest rate charged, how interest is calculated, who the parties are, term of the loan, how a default or breach is handled, etc.

If the investor is looking to be a partner this is a separate issue and should be defined as well to avoid future problems.  I would suggest the business be formally setup.  An LLC might be the best structure and the operating agreement should be clearly thought out to cover the needs of all the partners and what could happen of new partners are taken in or if partners leave.  Lots of decisions to be made here.  Much of it depends on how involved each partner may be and how profits/losses will be shared.

Sean Carroll · Answer

@Richard Z. try using rocketlawyer.com

Richard Z. · Answer

Bryan/Charles/Bill,

Thanks a lot for all your valuable input, after reading through your input I believe a LLC entity and an operating agreement will be more suitable for my case. As this investor is more like profit sharing at least for a year period. I also might have other investor/partner coming in if first few cases work out nicely. So how to write up the operating agreement will be very important and there are a lot of things to consider.  I will look for an attorney to see how I can structure the agreement.

How to write this private lending agreement?

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