Partnership strategy & legal Q's for Friends & Family investors

[Brian Kantor]

Hi there. We're about to make an offer on a property and I have some questions about a good way to compensate equity partners and also any sort of legal/financial issues around the idea.

Long story short, we're about to put an offer in on a commercial property that's about $500k + $500k needed in renovations. With a 75% LTV commercial loan, we'd roughly need to come up with about $250k down. My wife and I would look to put in about $125k of our own capital and raise the other $125k from Friends and Family.

Question 1:

Our underwriting has the property taking a small loss in 2022, generating about $100k in cash-flow in 2023 and then building up nicely over time. By 2032, we're looking at around $600k in cash-flow. (That's reflective of additional renovations we'd execute over time.) Our thought is to offer our friends and family investors somewhere between 0.5% to 1% equity ownership for every $10k they invest (and giving them between 6.25% and 12.5% in aggregate). At $100k in cash-flow in 2023, that's between a 5% and 10% cash-on-cash return for investors, that scales up to about a 30% to 60% annual COC return in 2032 and even more from there.

Question—Is that a fair deal for both us and them?

Question 2:  Keeping in mind that this is friends and family and not investors outside our our first-degree contacts, what sort of financial and legal issues do we need to keep in mind, if any? Do we need to treat this like a syndication? Or can we just package in their capital with ours to fund the down payment and draft an agreement with an attorney that outlines roles, rules and returns?

[H. Jack Miller]

what ever everyone is in agreement works. But some words of caution. Make sure everyone's interest and goals are aligned. Often they change over time and this can cause great friction. Have a buyout clause, where you can buy them out. Make sure everything is in writing and everyone read and signs it. Every marriage starts off thinking there's was made in heaven, but 50% blow up. Its the same with investing there is often issues. I would build in a good cash cushion for the partnership. You maybe want to do a standard deal where the investors get  preferred return lets say 6% with a 70/30 split. This is more standard. But what ever works for everyone is good.