Need help structuring my deal with 2 private money lenders

[Marci S.]

I'm an experienced flipper and BRRRR investor, doing my first deal with equity partners. Hoping for some advice on how best to structure.

Here are the numbers:

Palm Springs property, will be a high-end Airbnb (after remodel is complete and STR license obtained)

Purchase Price: $2,300,000

Rehab Budget: $150,000 (yes this is low but this one is only cosmetic)

ARV: $3,000,000

Hard money 12 month bridge loan, 80%LTV and 100% construction. I am the only one on the loan.

Cash to close (including all closing costs, fees, and insurance): $415,000

Furnishings Budget: $30,000

I have one investor that is putting in $200K, and one who is putting in $100K. Both of them have done private money loans to me in the past, and now want to move into being equity partners with me. 

I think I have heard it all by now about how to structure this! 

Everything from I should take 50% for being the deal provider, loan holder, construction manager, and rental manager; leaving the other 50% to be divided up according to how much cash each of us has in the deal...

Or - I take a construction management fee of 10%, and an acquisition fee of 2%, and divide the entire 100% of equity among the 3 of us respectively...

Or - I pay them an annual return on their investment (ie an interest rate of 8%), plus a % of the profits (not sure what to base this % on?)

HELP! I have read Raising Private Capital several times, as well as several other BP books. They are all great but I'm struggling to get this deal structured - 

Thanks for any advice! 

[Matthew Bernal]

Aloha! 

I have completed 24 deals using the, "Crowd Fund," model. Here's what has worked for me: award a capital partner an equity position that is equal to their contribution.  

The cap stack of any acquisition involving a mortgage consists of a combination of debt and equity. In your case, 80% debt with a 20% equity contribution needed to close. Add in another 5% (for easy math) to cover all the fees, costs, and buffers, and your LTV comes out to 105%, which puts you, the one carrying all the liability and risk, underwater on this project.

While it's true that they are bringing the capital to close, which is wonderful, you are providing a lucrative opportunity for them. They may make the argument that there are a thousand opportunities out there, and they'd be right. That being said, for every thousand opportunities, only a handful of them are GREAT opportunities, which can still be financially devastating without a competent leader to see them through. 

In short, you are bringing more value than them. Your credit and experience made it possible to bring $1,990,000. They are bringing $415,000. You are taking on all the risk, bringing all of the experience, and have already proven yourself to them. Offer them equity equal to what they are bringing to the table, which is 25%. 

If you made it to the end, hope this helped!