Hi - Me and my partner(Tom) have been investing together for some time. We started a new ABC LLC with a common friend(John) and got a deal under contract due on financing(75% LTV). Come to find out lenders had a problem with John because he is putting in 60%($100,000) of the initial investment, no landlord experience and he is not a US citizen even though he lives here on E2 visa and has been investing through his US based XYZ LLC.
So Tom and I re did the ABC LLC with just us as the members of the LLC and lenders were fine with that. We are closing in a few weeks.
Question - How do we contract with John now for the initial investment?
1 Can't bring John on as a member of the ABC LLC since lenders will have a problem with that when they find out. Can our ABC LLC do a limited partnership with XYZ LLC without raising flags with the lender?
2 We can do an interest only promissory note like (John get x% on the capital) but John had agreed to 54% equity in the original deal and all 3 of us would like to do a promissory note with profit and loss sharing, where John gets amount equivalent of 54% of total cash flow calculated end of each year + 54% of the mortgage principal pay down at the end of the term(lets say 3 years)
eg - if the cash flow is $10,000 every year(for simplicity), John gets $5,400 every year. And at the end of the term, lets say total principal paid towards the mortgage is $20,000, then John gets $10,800 once.
So John's total return is $5,400 X 3 + $10,800 = $27,000 (roughly >9% because cash flow will ideally increase every year)
Is there a way to structure the deal like that through a promissory note?
3 Is there any other option?
In my experience, for a commercial loan, typically the banks want to know a lot about anybody with 25% or more of the equity. It's not clear from your post but I presume he may also have had the majority voting. The bank is certainly not going to want a foreigner, newbie, to have control over the asset that is security for their loan.
With that in mind, I would presume that any structure where John is not on title and John does not have a vote in the ownership LLC you would be OK with the bank. But, if I were John, not having equity or control of some other sort might make me walk away from the deal. Your best bet is to first have a conversation with your contact at the bank to understand their concerns and discuss ways to put the deal together that avoids their concerns.
Thanks @Greg Scott . I'll talk with the lender and see if we can get creative.
You can joint venture with XYZ on whatever terms you like after the transaction with the bank is closed.
ABC will hold title and be the sole borrower on the note.
XYZ will have a contractual right to proceeds in proportion as you agree on but not any property rights.
How do we contract with John now for the initial investment?
Change the LLC operating agreement with respect to shares. The two of you are still personally liable for the debt and the property still serves as collateral.
Check with your lender first though.