Partnership Proposal for Rehab and Hold - Quadplex

7 Replies

Hello,

I am in the beginning stages of partnering on a Quadplex deal. I want to get the partnership structure taken care of ASAP so we can agree/disagree, negotiate and move on.

My partner is out of state (California), and he will find the money (his network) for the down payment. According to my understanding, lender will cover 100% rehab, so we just need closing costs (fees, inspection, appraisal, down payment etc).

I am local to the deal. It’s right down the street from my short term rental property.

I will coordinate and manage rehab with the GC that we higher. 

I’ve never done this before, so I need some input if it’s available. 

Do you have a document to share? PST partnership proposal?

Is 50/50 fair?

I am all ears!

Thanks,

Nick




@Nicholas Aja , I suspect you won't like my opinion.

I think the ownership percentage should be based ONLY on monetary contribution. So, if your partner contributes $9k and you contribute $1k, then its a 90/10 split of equity.

However, I think whoever does actual WORK on the investment should be compensated for that work. If you are managing the rehab, you should be paid for that. If you are managing the rentals, you should get maybe 8% just like any other PM would. Then you can use your earnings to buy a bigger % of the next deal!

In my scenario, its ALWAYS fair. If you get a 50/50 split from the get go with no money contributed, then you could immediately force a sale and collect 50% of the net proceeds without doing any work managing the property. 

@Nicholas Aja congrats on finding a place and putting the deal together to make it happen! There are a couple things that stick out, I would say here for your deal and getting an agreement together.

1. I would for sure use an attorney to structure it as long as it something that sounds a little complex as your deal. There tend to be and are usually more moving parts than one thinks about when getting into the deal and $1K-$2,500 is a better cost than what could happen if one partner changes their mind down the road. This is also the case if they have a significant other as well. Many things the bring into play here as you look at this from a 30K foot view. 
2. I would structure it as a sweat equity deal and money deal. You can really write the agreement with the attorney anyway you both feel comfortable and I would reference above. One of the BP Podcasts Brandon Turner talked about getting on a conference call with an attorney to walkthrough the whole situation along with the other partners to make them all think outside the box. Not saying that needs to be done, but meeting with legal is always a good thing. 

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@Kevin Sobilo the partner is not bringing his own money. There will be a third party being brought in as a debt partner who will eventually be bought out.

SO, you’re saying that if someone brings a down payment and I run all the operations and essentially manage the property I deserve less ownership?

Shouldn’t both parties have to agree on a sale? 

By the way, this is a first deal for both of us.

@Peter Mckernan

Thank you. This is a past podcast guest of mine. Pretty cool that a partnership has come of it.

I agree… sweat equity / money deal.

So how would you split that?

I have reached out to a local real estate attorney 👌🏻

Thanks,

Nick



@Nicholas Aja it's really up to you two and the relationship all-in-all. 

I have done a 15%/85% due to the money I was bringing. That was just on the return and money into the deal. We were still 50/50 partners, but on the returns and money I would be putting in along with getting return mine was a lot smaller and sweat equity was higher. Also, another point here is that it was going to change down the line, we ultimately stop the partnership before it got there. 

A partnership should start with the question of who is on the risk in case the enterprise goes south.  I assume you are involving recourse-based lending here.  Will you be responsible for repaying the lender in that event? Your partner?  It's not enough to think of upside, you need to consider financial responsibility for downside events.  

My personal default is that equity should follow the money but as it seems your venture will be 100% debt-financed, a 50/50 responsibility for liabilities should support a 50/50 split of profits under the circumstances you describe.      

@Nicholas Aja , ownership should be based on financial contribution. What do you think happens when partners cannot agree?!? At some point sooner or later you need to divest. If that happens early on the person contributing the money loses and the person contributing the work wins out financially.

Ok, if you have 2 parties doing all the work and one bringing money who "will be bought out", then I would do something like this. You and your other active partner each contribute a nominal amount maybe $1k each and each gets 50% ownership. Then just borrow the money from the 3rd person and give them a lien on the property. Depending on how you finance your purchase it might be a 2nd mortgage, but it still secures the loan. So, this 3rd person is "bought out" when the loan is paid off. They are just a lender.

Then you and your other active partner should pay yourselves based on what work you do. It won't always be equal and in the short run you may not care, but in the long run I think it matters.