Partnering with a friend on a commercial property

[John Coffman]

Hi BP friends! My wife and I have mainly done long term buy and hold over the last 12 years of our investing career and have an opportunity to partner on a small scale with a friend who is purchasing a commercial building they are leasing currently for a different business they operate. The price is $4.2 mil for the building and the down payment is $840k. We would probably be putting $100k in and getting a 2.4% ownership in the building but we haven’t done anything like this before and are wondering how a deal like this should be structured for returns? Would it typically be just an equity play or would one expect to get a percentage of the monthly income as well? 
Thanks for your input! 

[James Storey]

Hey John,

It depends on if you are taking a GP (general partner) position in the investment or an LP (limited partner) position. The way you asked the question makes me think that you are structuring as a limited partner in which an annual cash flow yield (set by you and your partner) will be merited with lower upside on equity if much at all unless you negotiate upside. On the other hand, if you are taking a GP position (your name will be on the operating agreement), then it depends on how much the property cash flows will determine your individual yield. 

James Storey, CCIM