Deal Structure for Partner Buyout

5 Replies

I have a straight 50/50% ownership in a property I bought with a partner a year ago, and it is doing well. I like the upside potential, and am trying to build my portfolio, but don't have hundreds of thousands in cash. I have proposed buyout terms below, but interested in any feedback, alternative deal structures, etc.. He's a passive investor, looking for longer-term growth.

I'm considering offering my partner to replace his cash investment in equity in the property with a note that is 30% higher in principal balance than his cash investment (to account for some appreciation in the last year), and a 12-15% interest rate, secured by the property, and my own personal cash flows. 7-10yr amortization, or interest-only.  It's a little more than the property throws off right now, but there is some upside in rents and appreciation. I can easily cover the difference.

PROPOSED TERMS

  1. Replace cash equity investment w/ note w/ 30% higher balance
    12-15% interest rate
  2. 7-10yr amortization, or interest-only

He definitely likes the equity return, so I feel like it would have to be a pretty attractive offer to get him to swap out of the equity..

@Amit M.  ,

This is my prior deal that I have those interest-only notes with. Separate from the equity portions above. Any thoughts?

@Minh L. , @Ken Lau  , @Joe C.  ,

Advice or ideas on different structures? I'd like to put very little or no cash out now, but have the ability to service a significant amount of debt, with margin..

Medium logoJ. Martin, SF Bay Summit | [email protected] | 510‑863‑1190 | http://www.sfbaysummit.com

With a 14% rate you could just buy out his interest selling a note to a third party for the cash, backed by the whole property to keep the ITV ratio reasonable for the note buyer.  I could find someone to buy the note on this if you want, I don't think it would be to hard to find someone to buy the note as long as the ITV is reasonable.

By all means give your partner the first choice, they have done right by you, but if they just want the cash you have some other options.

Bob E. MBA, LD Funding, LLC | [email protected] | 909‑353‑3863 | http://www.LDFundingLLC.com

@Bob E.  ,

Thanks for jumping in and the suggestions. My partner wants long-term growth, so the immediate buy-out is not the goal. Goal is long-term growth of his investment for him. Replied to you on PM also, and let you know about a discounted performing note I know about for sale, if you're interested...

Medium logoJ. Martin, SF Bay Summit | [email protected] | 510‑863‑1190 | http://www.sfbaysummit.com

@J. Martin

It sounds like a tough sell for your partner. You guys essentially have the same goal in mind with this investment. The terms you posted are pretty generous, so if he isn't even entertaining the offer I can't imagine what you could offer, with in reason, to have him give up his position.

Even a phased buy out to give him exposure to appreciation wouldn't really make sense for him if his is goal is to build equity long . Also you don't want to cause any ill feelings with someone who has been a good investing partner. Over time people's situations and investment goals change, so you might wait and see if something changes that will give you an opportunity to buy him out.

Could you PM me details on the discounted performing note? I am not a note buyer but I know a couple of people who might be interested.

@Ken Lau  ,

I agree. Its tough because we have the same long-term objectives (but at least our interests are aligned..) 

I was thinking about finding another deal for him to roll into a new one, but he's going to be spending lots of cash on a construction project on his existing property, so there's still the issue of the upfront cash, vs. the payment I want to make..

Maybe I'll just keep it like this for now :)

Medium logoJ. Martin, SF Bay Summit | [email protected] | 510‑863‑1190 | http://www.sfbaysummit.com