Opportunity Fund Ownership Structure

[Cody DeLong]

Myself and my friend both have some Capital Gains we'd like to defer into an opportunity fund to self invest.  He is going to be a more passive investor in this situation.  I'll be the one getting the deals, renovating, and everything else.  How would you structure the owner ship structure.  We're each bringing the same amount to the table as far as our capital gains.  Should we be doing an even split and then me taking a percentage of net fee for managing the projects?  We will be paying a property management company.  I guess what would you do?

[Will Hodges]

Originally posted by @Cody DeLong:

@Justin Kane Because it's an opportunity fund I don't think I could do a loan and pay him back.  Not really sure thats how it works.  He'd be losing tax benefits by doing that, wouldn't he?

 You could give him a "preferred equity interest" in the partnership as opposed to it being debt and they could still get the benefit that QOFs offer. To do that, you'd need to set up the waterfall/allocations to be something like the following: 

1. Return of Preferred Capital 

2. Preferred Return (i.e., whatever percentage you determine is best) 

3. Your Return of Capital (we'll call your interest common)  

4. Preferred gets X% of profits; common gets Y% of profits. 

This is one way to do it, but I don't think I'd structure it this way. I see preferred interests most of the time where one partner is bringing in the majority of the cash. In your situation, you are both bringing in equal amounts. Further, it sounds like you'll be doing most of the work in regards to finding deals. There are a few considerations to think about in regards to the services you are providing: 

Will you need/want the cash for your services immediately? If that's the case, then you can just put a number on it (i.e., X amount per deal or X amount per hour) and it can be paid out annually in the form of guaranteed payments. 

An alternate approach would be for you to take additional "back-end" upside that occurs as profits are generated or as your properties appreciate in value (and you monetize that appreciation). In the waterfall above, you'd essentially both share in the first tier the same (i.e., return of capital), you'd remove the preferred return tier and then in the last tier you'd take a larger percentage than your buddy since you will be providing more services.