Apt Building Partnership

2 Replies

My friend is a real estate developer who has successfully bought, renovated and sold/rented out a few small apartment buildings in the area (I live in the Bay Area so there are plenty of 4-8 unit buildings).  We are talking about doing a deal together.  I have a question about how to properly structure it.  We are planning to finance the deal so you can think of the bank as being another party in this transaction.

My question for the community is the following:  How do you guys usually structure these kinds of deals?  I see a few high level ways of doing it.

Scenario #1:

- Both he and I co-sign on a loan for the building with $500K each in cash towards downpayment.

- We contribute the asset to a joint LLC that we create

Scenario #2:

- He takes out a loan and buys the building for his own LLC.

- He then sells me a portion of the LLC for $500K.

I see some pros and cons to both scenarios, but I mainly want to make sure that I follow the established process. It seems like in scenario #2 if things go sideways and the LLC is bankrupt I don't really have my name on the building or any collateral. Do people generally do scenario #1? Is there a different scenario that people usually go for?

Obviously in our case he brings the experience and will get most of the profits - I am a 'Limited Partner' that just helps with financing, but I also want to make sure that I have the rights to the building.

Thanks!

Hello and I'm glad to see you here asking this question Mike!  I would suggest right up front that you need to hire an Attorney, CPA, or Business Consultant that has experience on similar "problems".  With that being said,  I just read a book about buying and selling apartment complexes and one of the things discussed by the Author was business partnerships.  He suggested a Partnership called "Tenants in Common" as a way that you keep control no matter what you contribute on a property's price and have different agreements with all Partners regardless of their percentage of their contribution of the purchase price.

Whatever you do just be careful, understand it, and feel good about the Partnership or anything put in writing that's a business liability of your personal involvement or responsibility whether it's monetary or not.

Good luck to you!

Originally posted by @Mike Bratsky :

My friend is a real estate developer who has successfully bought, renovated and sold/rented out a few small apartment buildings in the area (I live in the Bay Area so there are plenty of 4-8 unit buildings).  We are talking about doing a deal together.  I have a question about how to properly structure it.  We are planning to finance the deal so you can think of the bank as being another party in this transaction.

My question for the community is the following:  How do you guys usually structure these kinds of deals?  I see a few high level ways of doing it.

Scenario #1:

- Both he and I co-sign on a loan for the building with $500K each in cash towards downpayment.

- We contribute the asset to a joint LLC that we create

Scenario #2:

- He takes out a loan and buys the building for his own LLC.

- He then sells me a portion of the LLC for $500K.

I see some pros and cons to both scenarios, but I mainly want to make sure that I follow the established process. It seems like in scenario #2 if things go sideways and the LLC is bankrupt I don't really have my name on the building or any collateral. Do people generally do scenario #1? Is there a different scenario that people usually go for?

Obviously in our case he brings the experience and will get most of the profits - I am a 'Limited Partner' that just helps with financing, but I also want to make sure that I have the rights to the building.

Thanks!

For scenario 2, LLC owns and asset, you own interest in LLC, so you indirectly own an asset. It's just as case 1, LLC going " bankrupt" has same implications.

Very high level speaking. Rather than being on the mortgages and stuff, case 2 gives your more limited liability protection.

Both of the cases are normal, talking with attorney about you goals and intentions should clarify which one works for you.