Mobile park, protection from PM with skin in the game.

[George S.]

Hey BP community. I have a question and would like the communities thoughts on it.

I am in contract with a new partner on a mobile home, both as passive investors. I am planning on moving out of state and being an absentee owner while the other owner is staying put. The park has 40 homes, gross rent 110-140K yearly.

This is going to be the partners 3rd mobile home park purchase and is wanting to bring the property management company who is currently both managing and part owners on one of the parters other parks. The property management team consists of two late middle aged people that have been doing this full time for the past 3-4 yrs.

Two scenarios have developed
1. The management company wants 10% ownership in the company, which is loaned by us over 10 yrs, in addition to the 9% property management fee.

2. My realtor, who I completely trust, has approached me and said he is willing to manage the property on the side for 20% ownership, loaned over 10 yrs and 10% management fee. The realtor already is managing a 10 mobile park home that he owns on the side.

Questions

1. If I do scenario #1, how do I structure the LLC so that if the property manager is underperforming, or I learn about them taking money on the side, would I be able to boot them and return their equity, or do they have the legal right to continue and have 10% ownership as long as they are making their monthly loan repayment to me.

2. Do scenario #2, that way my business circle meets the criteria of only going into business with someone you trust, however in this scenario, it comes at the cost of me taking on more risk on the investment and possibly severing a fruitful relationship with a partner or partners.

Justing looking for a bit of wisdom, please provide any that may help. Thank you!! George.

[Hai Loc]

I would never do this. Giving the management company 10% ownership via a loan that is paid off in 10 years and on top of that pay them 9% management fee.. That means your giving them 9% management fee and 10% of cash flow..  Bro you serious.. I would not give away any capital at all

Instead I would create an LLC and on the operating agreement state that they have no ownership shares but they are entitled to 10-15% of the cash flow and any 5-10% of appreciation and principal equity.

your scenario example now 

$100,000 property value 

$50,000 loan 

$50,000 capital/equity   $5000 to PM 10% shares

In ten years

$150,000 property value

$30,000 loan

$120,000 equity   $12,000 to PM 10% shares

My scenario

$100,000 property value

$50,000 loan

$50,000 capital     0 to PM

in 10 years

$150,000 property value

$30,000 loan

$120,000 equity

$50,000 capital

$120,000 equity - $50,000 capital 

= $70,000 equity on appreciation and mortgage principal (PM 10% = $7000)

my bottom line is the PM should not have any part of the capital and ownership..  I can't think of a simple exit strategy for them to get bought out if they have ownership shares..

Good luck..