How would you structure the partnership?

Question

Recently I have been discussing establishing a partnership with a couple of investors in the same town who could bring in credit partners to get traditional bank financing.
So there's me, A, investment group, B, and credit partners, C. 
So we would approach a deal by putting in the down payment in splits 25% A, 25% B, and 50% C, A & B manage, C the silent partner. Rental net income plus future equity profits will be separated according to those percentages. 
How would you structure this? Deed it to a LLC? A trust?
And what if A, B, and C have different investment horizons and want to cash out at different times?
What kind of structure will allow me to not sell my interest as I'd like to keep cash flowing forever? Or do I set a clause for buy out?
Would love to hear from you guys.
Thanks in advance!

Dion DePaoli · Answer

Whereas:

Investor A = You
Investor B = Two other local investors
Bank = Bank (debt)*
Manager LLC = Investor A & B joined

*Just to make sure, this is debt from a bank or private lender, etc.  Point is this entity is not an equity member to any of the equations.  This entity would receive a 1st lien evidenced by a mortgage or deed of trust securing the promissory note which details the loan and terms of repayment.

Investor A & B want to come together and manage an asset(s).  It reads like you both want to be equally active.  We (the reader) are not sure if Investor A is your as a natural person or you have your own LLC or LP nor do we know the same about Investor B.  Both can work in any combination.  For the sake of clean, I would request Investor B create their own LLC for organizational purposes.  This will also help stay effects of those two working as a unit in the future with you.  To not detract from the point, "trust me".

Investor A seeks a 50% equity share in Manager LLC and Investor B seeks a 50% equity share in Manager LLC.

Manager LLC = Investor A (50%) + Investor B (25% + 25%)**

**What each guy's capital contribution inside the Investor B amounts to is of no consequence to you.  Same with other details inside Investor B as its own unit.

Manager LLC will create an operating agreement.  That agreement will detail how decisions are made and how Manager LLC can be directed in the real world.  Since we have split the equity into two pieces you will need to create a way to resolve voting rights since they can be a tie at 50/50.

The voting rights can be dealt with in a variety of ways and still protect each member of the LLC (Investor A & B).  You guys will have to sit down and just talk these things out.  Do it with some pen and paper.

Just taking the lead on one way in your favor, Investor A would run the operation.  Investor A would pay all the bills for Manager LLC from a operating bank account and be responsible for accounting and back office work.  Investor A and Investor B would both be a part of the Investment Committee which meets to decide on what to invest in, when, where why, etc.  At those meetings or the conclusion of those meetings investments would require 100% agreement from both Investor A and B.  A detailed plan including budgets and use of funds would be recommended to get signed off on so what you are agreeing on is a fully thought out plan and document as best possible.  Repair budgets, cash flow, amount of debt, etc. etc.

Moral of the story is, you guys need to workout who does what and how.  How will you make decisions and who will direct the company.  I will leave that part for now, there, feel free to inquire on sub-topics of relation to all of that.

When you purchase an asset, I would drop that asset into its own LLC.  So asset or assets = Assets Co, LLC.  That company is wholly owned by Manager LLC.  Assets LLC has its own P&L and Balance Sheet even though it is essentially just a pass through.  This will help segment the costs of operating Manager LLC from operating the actual assets.  You can put one or more than one asset into Asset Co LLC.  Also, you can use different Asset Co, LLC for different capital structures in the future if you gain other partners or have different manners which Investor A and Investor B raise capital.

To help make this mentally click and keep it well documented.  Asset CO, LLC would give a contract to manage with full corporate resolution to Manager LLC.  Asset LLC can have its own bank and accounting where Manager LLC collects a fee to manage.  At year end or project end gains would flow up into Manager LLC since it is the only equitable member of Asset Co LLC.

Bank would use Asset Co LLC as the borrower and take lien on the underlying property.  Likely since Assets CO LLC is wholly owned by Manager LLC, Manager will have to guarantee.  The bank may want a mortgage or deed of trust on real estate plus a UCC lien over all assets in Asset CO LLC.  Fine.  The debt service would be a function of the Asset CO LLC income and expenses.

Cash flows like this:  Income from asset into Asset CO LLC.  Asset CO LLC covers all expenses for assets including taxes, insurance, debt service and manager fee to Manager LLC.  The net proceeds from Asset CO LLC then roll up (are payable to) to Manager LLC (different line item entry than the manager fee collected).  The two sets of revenue into Manager LLC would pay for all of Manager LLC bills such as office space, phones, computers, etc, etc.  The net proceeds after that would split to each Investor A (50%) and Investor B (50%).

So I got to think, that is going to take a couple of reads to follow, maybe.  We can use that as a baseline to amend different spits and sharing arrangements in future posts.  That includes adding 3rd party investors into Asset CO2 LLC.  But we will save that unless you have questions.