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?