Forming an LLC or a Partnership and getting financing

[Anna Hamann]

Hello everyone,

Myself and 2 of my colleagues want to invest together, and we wanted to find out what is the best way to organize ourselves. Form an LLC or a partnership? Then also if we are all willing to get financing, we do that individually? can an LLC get investment financing?

[Adam Giles]

What is their reasoning? 

When we do it, the "borrower" is literally the LLC. No individual names are, other than who signs. That is determined by the Operating Agreement, primarily the share structure and title/power distribution (who is a managing partner, who can sign, who can distribute funds and under what conditions, etc). They will likely still want financials on all members that hold more than 20% of the shares in the LLC.

I would honestly say that I would need to strongly consider a deal where I alone signed a note for 75% of a property, and had two partners that "owned" equal thirds of said property. Someones going to end up with a pretty large owner equity contribution on the books. If that is how you end up doing it I would just make sure the share structure is fair to whomever assumes the risk of carrying the note. 

It sounds like perhaps the mortgage broker may be guiding you to a process that works well for them. There is no reason to trust that they have your companies best interest in mind. I would suggest you speak with that attorney, and a CPA, and find what works best for you and your partners. I like creating LLCs for small groups of deals. I set up an LLC with a 90/10 split for a couple of properties, and perhaps another with a 50/50 split for another small group of properties. When I find a deal I talk to the partners and ask "where do you want to be on this deal, 50% or 10%?". I won't let too many properties pile up into a single LLC because that begins to erode some of the liability protection. I do not believe that each property needs its own LLC however. Good systems, thorough maintenance, and good insurance are the primary liability protection. The LLC simply prevent an end all disaster. If a partner decides he wants to be at 50% on a deal and we have an LLC set up at that share structure that can hold another proerty, we simply write equal checks for half of the down payment and make owner contributions to that LLCs checking account. Then we cut a check for the DP and get financing in the name of the LLC. The bank will ask for updated financial statements from the members since we are both >50 in shares, and we close 3 weeks later. We get liability protection, clean books, and a clear and equitable division of the ownership, debt, expenses, and everything else for that property (along with any others we own in the same partnership).

If this is the type of structure you are looking for, and your attorney and CPA support it...or at least make you comfortable with any benefits/risks/trade-offs, I would just continue looking for a lender that supports it. They are out there...I promise you. I work with them often. I would say that they exist in greater numbers in community banks and credit unions. Portfolio lenders will always be more flexible with working on unique situations.