Silent Equity Partners

[Lee Gagnon]

Below is a scenario I've been playing around with in my head:

A silent equity partner and I purchase a strip mall for $5,000,000. We own the mall though an LLC which we both have 50% ownership stake in. A commercial bank provides loan with 70% LTV ($3,500,000). The silent equity partner provides $1,500,000 for a down payment. Equity partner and myself are both guarantors of loan OR with strong credit of equity partner, we qualify for non-recourse loan. We would anticipate three ballooning loans, each with 7 year terms until the loan was paid off.

In the above scenario, my contribution would be as the sweat equity partner. I would be dealing with tenants, property, etc. I would pull 10% NOI for life of loan as payment for my service. The silent equity partner would pull 40% NOI for life of the loan, not having to be bothered at all with any management of the property. The remaining 50% of NOI would be used as capital improvements, reserves, etc.

Once the loan was paid off, we would sell the property with proceeds being split 50/50. A 5 million dollar strip mall appreciating by 3% annually would give the property a value of around $9,000,000 in 21 years. Split two ways, that would be around a $4,500,000 slice for both of us, not to mention the NOI received over the course of the loan.

My question is -- are there silent equity investors who would be willing to jump on board an investment like I just mentioned? Generally speaking, the silent equity partner would make his $1,500,000 back from the NOI over the course of the loan, and the $4,500,000 would be their return on investment, of course not realized until the property was sold. Total return for silent equity partner would be $6 million. Let's also assume that the strip mall is in a growing community, poised for growth for many years to come. Let's also assume that most tenants of the strip mall are nationally recognized companies with strong leases.

Thank you all in advance for your replies.