How have people structured partnerships?

Question

Hello everyone,

I have been doing some research into creative financing and specifically partnerships. I think they are one of a few options that really make sense for me and my goals. If you have had experience either on the capital side or management side of one of these deals and are willing to share what the terms were I would greatly appreciate it.

I am curious too if anyone who was on the management side of things added a buyout clause? I like the idea of me using other peoples money to buy properties, but I don't like the fact that in several scenarios I've seen the capital partner is a part of the deal until it is sold. I'd rather buy them out 3, 5, 10 years down the road so that I get full ownership and full profit.

Thanks!

Stuart Udis · Answer

The appropriate structure for a partnership depends heavily on the individuals involved, their respective skills and strengths, the asset class, the investment strategy and many other factors. It is important to understand each partner’s wants and needs and ensure that the partnership terms and overall strategy align with everyone’s objectives.

Regardless of how the partnership is structured, two ingredients are essential to its success: appropriate capitalization and adequate knowledge and expertise. No matter how strong the underlying real estate may be, it is extremely difficult for the partnership or the investment to perform well if either is missing. Undercapitalization creates pressure at every stage, while a lack of experience leads to avoidable mistakes, delays and unnecessary costs.

Jamie Parker · Answer

@Garrett Keith

I am doing my first equity partnership for a single family fix and flips. We used 2 agreements.  On the debt side we used a demand note to secure a second mortgage.

1st JV Agreement to handle the movement of EMD funds, Ownership based on investment and what happens if the deal doesn't make it to closing. 2nd  JV Agreement  to handle scope & capital Contributions, Dedicated Banking Accounts, Budgets and contingencies, Operating and Holding Cost, Reporting oversight, and Exit Strategies to include takeover rights if the deal doesn't sale is a specified amount of time.

Demand Promissory Note. used to secured funds as  second position debt on the property.

Takeover rights clause is a "what if the deal goes bad" kinda measure.  I don't understand the need to have a buyout clause wrote into the agreement "if the deal is going well". Also if you are able to buyout the partner's equity, would that put the deal in an adverse position at acquisition on your part?

I would consider how the equity is factored. if its a 50/50 split, how do you give out 50% of the deal? 25% down and 1% per month with a ballon in 36-60 months? In the  event you want to buy the partner out, but what if the partner was 100% of their equity?

I underwrote a multifamily property in Louisville Ky that is in this exact position according to the broker. One of the partners want out and the asset isn't as profitable as the partnership had hoped at this point. The move would be to Bring some new capital and renovate but, they aren't together on that move.  25% down on acquisition + renovations cost would required almost 1.5-2mil to give the property a chance to be profitable again.

I think wanting more ownership should be saved for your next deal because buying the partner out may not be worth the squeeze. Use it as a stepping stone but thats just how I see it.

Don Konipol · Answer

“ Regardless of how the partnership is structured, two ingredients are essential to its success: appropriate capitalization and adequate knowledge and expertise.”

The inexperienced always spend too much time and effort on form, and too little on substance.  Years ago I was asked to lend capital to a deal where the 4 partners spent 5 months trying to decide on whether to operate under an LLC or S corp, as their option price on their subject property increased by $10,000 per month.  They apparently eventually got the form “right”, but paid $50k more for the property which was cash they brought to the closing table.

Garrett Keith · Answer

I am likely going to propose a partnership with my boss. He and I get along well and I knew him well before working with him. He is very reasonable and knows my family very well and vise versa. I am confident that he is a level headed individual. I would be the active partner, but I don't have a lot of experience. I have been learning and researching for a year or two now and have a good idea of what to expect and what I need to have set before investing in another property. You said you recommend at least some money in the deal for the active partner. Where do you recommend the active partner put that capital? And how much?

How have people structured partnerships?

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