1st Deal - Who Gets What -

[Jordan Hamilton]

Hey Everybody, I am in the process of landing my first multi family apartment deal (aiming for 16 units) in Florida. I have my investors who are ready to 1031 out of their existing single family rental property (worth 300k), local bank lenders ready, and a commercial broker who is sending me off market listings. My question is about how to split the equity with my investors. 

They have a total of $300,000 they are willing to invest in the deal of my choosing. They have some experience in residential properties but have never invested in a commercial multi-family and are exciting to get in. I am brining all the pieces together to get the deal and once I find the right one we will create an LLC or LLP with operating agreement. My role aside from getting the deal done (finding the deal, due diligence, negotiations, legal, mortgage, management company, etc) will be to oversee the property and its operations (we will have a management company who will do most day to day stuff).

For what its worth these investors are my girlfriends parents and I want to be fair in how we structure this. I do not have a high net worth or many assets and may have to have them sign the mortgage loan with me. What do you guys think is a fair % to split equity?

[Jonathan Twombly]

@Jordan Hamilton

Okay, first thing you need to do is hire a securities lawyer immediately.  What you are contemplating is a syndication deal, assuming that they are going to be passive investors and you are going to be managing the deal.  Someone like @Jillian Sidoti

In addition, you immediately need to bring in a 1031 exchange expert. Your investors cannot sell their property and 1031 into an LLC - the exchange will not count. You need to consult with someone who can tell you how to do this, like @Bill Exeter

These things are VERY important.  If you screw up your girlfriends' parents' 1031, you will definitely regret it.

The next thing that you have to understand is how commercial debt works.  Even with non-recourse debt, you must have a guarantor sign on the debt who has a net worth equal or greater than the value of the loan.  So, assuming you are looking for a deal around $1,000,000, unless you have a net worth of $700,000 and are willing to sign on the debt, your girlfriends' parents must do it.  And I advise you to have them do it anyway, because if you break up with your girlfriend, do you really want to be the sole signatory on the note?

Only after you get these things sorted out should you think about the splits.  But, since this is a syndication deal, typically here is how it works:

Investors get a preferred return of 7-8%.  If you put money in as well, you also get paid the preferred return on that money.  A preferred return is a first claim on the proceeds, and if it is not paid then the sponsor (you, in this case) cannot participate in the proceeds.

If the preferred return is fully paid, then there is a split over the preferred return, typically ranging anywhere from 50-50 to 80-20 in favor of the investors.

When you sell, you pay the costs of the sale, pay the balance of the mortgage, pay any accumulated preferred returns, return any remaining capital to the investors, and then split any profits according to your agreement, 50-50, 80-20 or whatever.

As the sponsor, you can typically pay yourself a small asset management fee for overlooking the deal and managing the manager.  If you are managing the property yourself, you can pay yourself more.  However, if you have no experience managing a commercial property, it is very likely the lender will require you to have an approved management company in place.  Your "asset management fee" is typically 1% of the capital raised from investors, although I have also seen 1% or more of annual revenue charged as an asset management fee.

Hope this helps.