How do I keep money partners from personally guarantees?

Question

I am doing a $750k raise on a $2.9 million medical office building.  I am offering the limited partners a preferred return plus 50/50 of the financial benefit in the property, I.e. the cash flows, appreciation, and depreciation benefits.

How do I keep it so that I am the only personal guarantor while keeping my investors interest secured in the property?

All of the local banks I have talked to need other personal guarantors if I don’t own 81% of the membership interest in the LLC which owns the property.  The property is located in Rochester, NY.

Don Konipol · Answer

@Matthew Drouin

You as sponsor need to be strong enough to carry the personal guarantee yourself, or some lenders will bypass personal guarantees when the borrowers capital contribution is at least 50%. Btw, the 50/50 split is a bad deal for the investors as even the most experienced sponsors with verifiable track records are at 65/35, while many others are at 75/25 or even 80/20.

Don Konipol · Answer

@Matthew Drouin, you may be right but not because of the split, but because of deal quality.  I should explain that of 15 syndications 12 are high yield mortgage loans or note purchases.  These are structured differently with us either getting points upfront and a continuing service fee and/or part of the note discount on note purchase.

On real property syndication we make money by charging 4-6 points brokerage fee (I hold licenses in 4 states), asset manager fee, and 20% of capital gains after investor preferred return of 8% annually.

We’d never lose interest as our business depends on our track record and investors perception of our commitment, follow through, and performance when faced with adversity.

On another note, when the real estate depression of 2008 hit, the majority of syndicators went out of business, and the majority of those just cut and run.  While we went through a rough time then, we saw it through to the end.  Everyone’s a genius in a bull market.  When we have a bear market the shakeout will occur.  Unfortunately many investors will be turned off to syndications in general.  I don’t think the syndicators nor the investors truly account or prepare for downside risk.

Jay Hinrichs · Answer

well your dealing with or should be dealing with sophisticated and accredited investors.. this is not weird its the way LLC's work you can have uneven distributions as they relate to ownership.. at least that's what I have done for 30 some years.. Its pretty much in every banks SOPS to require PG ( if there is one required ) from anyone with more than 20% ownership

Matthew Drouin · Answer

@Phil Goodwin. I appreciate the response!  I don’t want any recourse to my limited partners.  The attractiveness of investing with me is that it’s passive and if things go sideways, their investment capital is the only thing at risk.

Matthew Drouin · Answer

@Caleb Heimsoth I did a 51%/49% before and I got a whole lot of push back from the bank.  We ended up closing the deal but they said it was a huge policy exception and wouldn’t do it again.  I don’t like to push the envelope on my banking relationships so this is not repeatable unless another bank sees no problem with this limited recourse type of arrangement.

Matthew Drouin · Answer

@Jay Hinrichs I would be strong enough if I sold some properties.  I don’t have that type of liquidity.  I was thinking of allocating the profit share in a way that was 50/50 but put the LPs at 19% to avoid this, but it I would feel weird being an LP in the structure.  I’ve done deals with the LPs before so they probably wouldn’t mind, but I’m trying to create a precedent and structure that is scalable going forward.  A potential LP who doesn’t know me might think this structure is weird and not protective of their interest in the deal.

Matthew Drouin · Answer

@Theo Hicks. Thank you!  This is a commercial property so it doesn’t qualify as a Fannie Freddie non recourse deal... I wish!

Phil Goodwin · Answer

If you borrow $1,000,000 from the bank and there are 3 partners with a 60/20/20 ownership and each would be responsible for a limited share: maybe $600,000; $200,000; and $200,000.  This has to be negotiated with the bank; if this is your first time borrowing money from "Anybank USA" then they will most likely not negotiate with you.  Unlimited guarantees, also called Non-Recourse,  means that the bank can go after each individual for as much as they can get in order to be made whole as quickly as possible.

Caleb Heimsoth · Answer

@Matthew Drouin. I went through this sort of situation recently. Partner and I split the llc 50/50 but I guarantee the debt. Bank was fine with this, but that’s a little different then what you’re trying to do

Jay Hinrichs · Answer

there are two issues at play

are yo strong enough on your own to get the loan with that down payment ?

if so..  LLC interest if thats what your doing can have uneven distributions.. thats why we use them

so you can own 81% of the LLC and spread the ownership to the others as you see fit.

in your operating agreement you spell out how proceeds profits and loss are to be allocated.

Although to be safe you need a PPM i think.

and you can set that up that way as well.. I just did one ..

How do I keep money partners from personally guarantees?

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