Partner structure for apartment complex

[Nathan Green]

Looking to see how I should propose a partnership. I have 1/3 of a 25% down payment for a 1.1m 16 unit purchase. This is a great deal with rents under market and well maintained buildings. If I bring the deal and 1/3 of the down payment to a partner and they bring 2/3 of it. We would both be active and work together on the day to day. What would the split look like?

[Arn Cenedella]

@Nathan Green

As @Charles Seaman indicated there is no set formula here.

In my mind, finding and securing a deal might be worth 5% to 10% of the equity.

If one works off this 5% to 10% guideline and ASSUMING THE OPERATION WORK LOAD IS SPLIT EVENLY (more on that later), then your 1/3 cash into the deal entitles you to 33% of the equity - allocating 5% to 10% of the equity for finding the deal - adding this to your 33% split based on cash might indicate you should receive 38% to 43% of the deal. Let’s say 40% for you 60% for your partner might be equitable.

The other difficult part of this is how one determines what an “even split” of the work load is. How does one determine that? How are roles and responsibilities set? Would keeping the books be considered equal value as to handling repairs and maintenance? 

If you two disagree on some issue, who gets to decide?

What happens if additional capital is needed, and one of you doesn’t come up with it? What happens if one of you wants out of the deal and the other doesn’t?

There are lots of potential issues and pitfalls that can arise in a partnership.

I believe you need to think about all of this and my sense would be to only bring in a partner you have a prior relationship with, one who you know well enough and long enough to be confident you both good work together moving forward. In other words, partner with a good friend.

I would be careful here, these partnership issues could derail even the best deal.

If finding the right partner is impossible then your alternative is to assign the deal to someone else who has the capital to take it down, and receive a large assignment fee. The amount of the assignment fee is also negotiable. How much under market value is your $1.1M contract value? If it is $100,000 say, then maybe an assignment fee of $50,000 is reasonable.

The numbers I use are simply to illustrate the thought process needed.

Hope this helps a little and good luck.