Partnership Financing Setup

[Braden Hobbs]

Looking for some advice on setting up a partnership and financing deals. Will be setting up a partnership, probably as a LLC. Here is the situation, please chime in with how you've done things in your businesses.

Each partner is contributing money towards a down payment/closing costs. One partner is providing more cash than the other 60/40. The partner contributing less cash will be getting the loan in their name. Here are some of the concerns we're having.

1. If the loan is in one partner's name, can the LLC take ownership of the loan or only get put on the title?

2. Is it possible for the LLC to get a conventional financing then we wouldn't have to worry about #1?

3. Would there be any advantage to the partners doing the loan as co-applicants? 

Thanks!!

[Jeremy T.]

@Braden Hobbs and @Jerry Limber

Yes, the LLC can get the loan though depending on your newness personal guarantees may also be needed.

I can share our experience but please consult with a lawyer and your CPA if you want to make sure it is done the right way.

We a have a healthy pipeline of deals we are managing ourselves. And increasingly we are being presented with partnering opportunities to lead projects for either out of town investors or local investors with less time or experience. Here is what we do:

1. Setup an LLC in the property address e.g. "123 Main LLC". This makes it easier to keep track of filings, Quickbooks entries, etc. and the chances are the LLC is actually available. When you go to put the property under contract you should either have an LLC ready and available or use the street address approach and hope for the best. So far we've been pretty lucky with the street address.

2. In your operating agreement indicate the ownership structure. We use a basic operating agreement that one of my business partners downloaded from Legal Zoom. Towards the back of the operating agreement (partnership agreement if it is an LP) there is a section on ownership %.

3. The loan and the deed to the property should now be safely in the LLC's name. However, if you are newer, as we are, you will also have to provide your personal guarantee.

The kicker comes in with your wanting to only have one of the partners on the bank loan. In most cases, any ownership interest equal to or greater than 20% needs to involve showing your financials and signing on the bank loan. If the partner had 19% or less ownership they would not need to show their financials or sign on the bank loan.

There are work arounds but you really need to consult with your lawyer and CPA. For example, you could in theory structure a 50/50 or 60/40 partnership and still list only 81% and 19% ownership on the LLC operating agreement for the partner signing the bank loan and the one not, respectively. This could be done, presumably, by structuring in a separate agreement some sort of fees or other arrangements that resulted in the equivalent of the desired ownership split.

Be very careful though. If banks want any owner with 20% or greater ownership interest to sign on the bank loan and disclose their financials intentionally working around this could lead to problems and is not fully transparent; proceed at your own risk. Can it be done, in theory, yes.