Syndication/Partnership

[Billy Guyette]

I have a high net worth individual that is willing to invest with me and I'm not sure how to structure the partnership. Along with some property holdings, I have a construction/property management company.  We would be after distressed properties in slightly marginal, but rejuvenating areas to add the most value possible. If my investor finances  100% of the purchase and rehab of the property and my company does all construction work, repositions the property, raises rents, and manages the property, what would a fair split be? I was thinking 50/50 split on everything, cash flow and appreciation. Is this fair for both parties? If things go well with this investor we could do a lot of work together, but I want both parties to be compensated. 

[Bryan Hancock]

There are far too many unknowns here to determine a fair split.  "Fair" is also in the eye of the beholder and really boils down to what you can negotiate.  Things to consider:

1.  How good are the deals found?  Finding an exceptional deal adds a ton more value than finding a decent deal and thus the person providing this value deserves more of the deal

2.  How well can you execute?  If the investor that puts up the bulk of the money can find other team members capable of executing better than you then you provide ZERO value from this perspective.  In fact, you provide negative value because you're costing the deal more than another operator would

3.  Who controls the deal?  It is fine that you're managing the deal, but who will ultimately control decision making and how will cash flow in the project?  This is very important

4.  How will debt financing if any be provided and who will guarantee the debt?

There are probably 100 other things to go through, but at a high level partner-level value worthy of an equity split generally maps to these types of activities:

1.  Supplying debt (lending or guaranteeing in some fashion for credit supoprt) or equity

2.  Finding great deals

3.  Ability to execute

It sounds like from your scenario above that you are presenting that you have number 3.  Number 2 is an unknown.  Number 1 is supplied solely by the other party.

In instances like this it is common to have some sort of preferred equity where the person supplying the capital gets paid back first and is junior to any debt financing.  The person supplying the ability to execute and that is risking their time and expertise gets paid last and is the most junior.  Common splits are 40-60%, but this generally assumes that the operator is supplying the debt.  If you supply zero debt and are risking solely your time it is more common for the money to get closer to 80% of the distributions and the labor to get 20%.

Again, there are too many unknowns in what you have presented to add much value on a message board with comments.