Is this deal even close to being reasonable?

Question

Hi, Im very new to property investing in the US. I was recently offered to be an investor in a mobile home park in South Carolina. The guy who offered the deal had done the sourcing, negotiated the price, done plenty of due diligence, found a lender for half the purchase price, and found a property  manager. Basically done all the work.  An LLC would own the mobile home park and be liable for the loan.

I was offered to provide the equity for the other half of the purchase price, and in return own half of the LLC.   So I would put in all the money but only own half the mobile home park, which doesnt seem like a great deal to me.

Is it normal that the person putting together a deal like this gets 50% of the equity for his/her work?  It seems excessive to me, but I have no experience of such deals, would love to hear what's normal in the US.

Thanks,Martin

Matt Boettinger · Answer

Hi Martin.  50/50 deals like this happen with flips in the single family home space.  I don't really hear about this in the MHP space.  Even with high caliber MHP operators they will give an 8% preferred return then 60% going to the money and 40% going to management.  The 8% 60/40 deal though is set up through a "506 Regulation D" organization.  I assume that you would just be a money partner in an LLC.

My advice is to look at the current NOI and what improvements in NOI that the partner put in the proforma.  If it matches your return goals and you trust the partner then it sounds like a good deal.  But given that even the best operators end up giving 60+% you could negotiate for a higher percentage.

Alexander Burnett · Answer

Martin,

In my experience, there is no standard split rule among partners in commercial properties. It's whatever you and your partners are able to negotiate and are happy with. This is how I have seen it work in many parts of the world as well.

What I don't like about the proposed deal is that one of the parties will be in second lien position (if you are the cash investor and deem it necessary to record a lien).

If the sourcing partner is bringing an institutional lender - or a bank - to the table they will likely insist on being in a priority lien position which puts you at higher risk in the event things go south.

Martin Sjogren · Answer

Hi Matt, that s very helpful, thanks!