Equity Partnership With Out-Of-State Investor

[Bradley Sindt]

Hello all. I'm working to purchase a few smaller multi-family apartments and in order to do so I'm looking to partner with an out-of-state investor. I've discussed this with a couple investors I've worked with and want to move forward. My partner is going to bring more of the upfront cash but I will have a significant amount in it as well. For the down-payment, the other investor would be bringing approximately four times as much capital as me but I found the deal, am the 'boots on the ground', I'm licensed, will be managing, doing maintenance, watching over them, etc. 

We've decided to start a LLC and we're planning on coming up with a very detailed operating agreement to outline all circumstances. I'm wondering what I should be most cautious about when drafting this agreement. I really need the capital in order to purchase all three of these buildings.

Any suggestions for the operating agreement when the out-of-state investor is bringing 75% of the down-payment, but you're going to be doing a majority of everything else? This will be my first partnership and I want to have everything covered. We've established a good working relationship and both want to hold these for the long haul. Since these are in my market, I want to be able to buy the investor out in the future. Any feedback/insight will be appreciated. 

[Brian Burke]

@Bradley Sindt, you ask what you should be most cautious about when drafting the agreement?  Actually, nothing at all.

That’s because under no circumstances should you be drafting the operating agreement. Your lawyer should be doing that, and your partner should have his/her own lawyer reviewing it and commenting. Until the agreement is authored and signed, you two are not on the same side of the table. Get the negotiating out of the way, sign the agreement and then unite to conquer the world. Want to know what causes all kinds of problems in partnerships?  Ignoring that advice. 

Now let’s talk about structure. There are two components to this venture:  work (bringing the deal, managing it, etc) and money. Treat each separately and allocate the economics to each.  As to the work, you can designate profits, fees, or both. The rest goes to the money, and that’s divided pro-rata. 

So let’s say for the work you decide that you get X% of the purchase price for bringing the deal and X% of the income for managing it.  Maybe you also get X% of the sale price for managing the sale.  Those are your fees.  On top of that you also get, by way of example, 25% of the profits. 

The other 75% of the profits goes to the money. If you bring 25% of the money you get 25% of the 75%, and your partner gets the other 75% of the 75%. So it looks like this:

• 25% to you for the work
• 18.75% to you for bringing 25% of the money
• Total to you 43.75%
• 56.25% to your your partner for bringing 75% of the money

These are just examples, mix and match as the two of you agree. It’s all just a negotiation. For the work, I’ve seen everything from 20% to 60%, it all just depends on what you two agree to.

Your lawyers will handle all of the other details such as what happens if one or both of you die, how one buys out the other (usually by averaging two or three appraisals) any confidentiality or non-compete provisions, who is responsible for what and what happens if someone fails to perform those functions, who has authority to do what and what needs to be voted on, etc.

Trying to draft this yourself can lead to disaster if something happens that you didn’t think of, the agreement doesn’t cover it and you two can’t agree on how to proceed. It’s much better to have those discussions now, and if you can’t come to an agreement at least you don’t have real estate and money tied up in the discussion.