JV Partnership - Fix & Flip

[Nathan Frey]

I'm am about to partner with someone in the Atlanta on a fix & flip property in the Canton area. I have a draft JV agreement, but the general structure is I would provide the capital (up to a max amount), he'd cover the rest, his name would be on the loan / title, and I would be a partner in the JV / operating agreement. General split is TBD but likely 50/50 or so.

I'd love feedback regarding how to guard against a deal that goes bad / how to write that into the agreement.  Another option for structure is I may just loan $X and ask for a flat percentage fee on  the loan - I'd likely make less money on the deal, but avoid downside.
 

[Rob Beeman]

@Nathan Frey It sounded like your initial post mentioned that your partner's obligations included his name being "on the loan/title". That indicates that a loan is being gained IN ADDITION to your capital infusion for your part. Is that correct? If so, then any loan that you extend would be a 2nd lien, subordinate to the lender's first position mortgage. Having been in that 2nd lien position in the past, my take on that is that 2nd position is not a good place to be, but if there is no other option and you want to do the deal, then you have to weigh the risk.

Here is a thought (NOT advise):

If you like the deal and feel comfortable with the partner, and IF there is a lender involved that your partner is guaranteeing a loan with (and the lender doesn't freak out over a 2nd lien on the asset) then maybe this could be an option. 

IN ADDITION to having you as a member of the LLC, create a LLC Resolution that states who is doing what on this deal and who is benefiting how on the deal. In that Resolution state that your compensation will be (as you suggested) 50% of the profits, with a MINIMUM figure of BLANK $'s. The minimum figure would be equal to the interest that you would earn on your funds used. This way you at least gain the benefit of the interest gained (like if you were a lender on the deal) and hopefully more than that figure when the deal proves to be profitable and has a 50/50 split.

In addition to the LLC Resolution created, you could place a lien on the property (recorded at the Recorder of Deeds Office) for that minimum figure stated in the Resolution. The lien would be in 2nd place behind the lender's mortgage that he is using, but would prevent the property from being sold or refinanced without it being released (you getting your minimum figure).

When you guys sell the property (or refi it) you release the lien. This acts as collateral (in addition to the LLC membership and 50% of the assets owned by the LLC), and protects you a little more than just membership. Just a thought.