Partnering Up

[Account Closed]

How do you folks structure everything when you have a passive investor invest money to get into a deal? I've read about this, and had relatives with money come up to me, and basically ask me to be their work horse to fix up and manage properties for 50/50 split. My question is when we go for loans, do they go in my name, or the investor's, or both?? I'm sure we would set up a unique LLC for our investing as partners, but the LLC would not get the loan these days...would have to be in someone's name i'd imagine...thanks.

[Bill Gulley]

Hi, Susan has some good ideas here, especially from the debt contribution angle. Your situation is not unique. There are several ways to do what you're trying to accomplish. As Susan pointed out, your partner can take a debt position. But let's carry this further in a LLC.
Your partner can make a loan to the LLC, not for the property, but as a loan for operating capital. This loan will have terms that can be designed to require a reduction of principal upon certain events, such as a capital increases above a stated level. (What happens when your property is sold, it goes to cash and then to the capital account then a per centage of the stated overage goes to the reduction of the partners contribution) But so far, your partner has not made any money, they only have received a payment of the loan. Your Operating Agreement can spell out the degree of profits to be shared and losses need not be equal. If you have a fifty-fifty split and do not address how liabilities will be shared, then they will be equal as well. But, let's say that your money partner does not want to go on any loan or be laibale for any losses. Just spell that out in the Operating Agreement. Spell out also how income will be contributed to the partners. Income to a certain level will be split between all members equally and any excess shall be made as a contribution to capital. Now your partner has made money and received his loan payment. Your partner is not liable for any losses and according to the Operating Agreement his consent to incur debt is not necessary, since he has no liability, which means he does not have to approve any loan made in the name of the LLC. Be sure too that the minutes covers this aspect of proposed loans without his objection. His loan to the LLC is made on a non-recourse basis as far as your personal liability is concerned. So now what you have is cash on hand without any personal liabilty to you (as the guarantor of the LLC loan made by your conventional bank/lender). Your LLC only has an obligation to pay upon excess contributions to capital, which means the LLC won't go broke because of that loan, payment is only required as profits are made. So, there really aren't any debt coverage ratios here to meet since payment is only contingent on profits and profits to that partner loan are only assessed after income is realized for the conventional debt servicing. It's a contingent liability without personal recourse to the guarantor of the conventional loan.
Show your lender your LLC Articles, Operating Agreement, and all associated loans/capital contributions.
Explain it to them and you'll be fine! And as Susan pointed out before, your personal loan capacity will be unencumbered.
I really like LLCs, Operating Agreements, Lease-Purchase/ RePurchase Agreements, Promissory Notes and Trusts, they are all great dancing partners, you just need to be on the same sheet of music! Play them like a musical instrument to any beat you like! Hope this gives you some ideas. Good Luck, Bill