How to Structure the Partnership

Question

A friend of mine from overseas is interested in investing in real estate in my local market.  He would provide 100% of the financing (through his bank at a low interest rate) and I would provide the oversight and coordination of the purchase, renovation, and maintenance of the property.  We agreed to split profits 50-50 with the monthly maintenance allowance available to me as-needed.

My issue is that I am having trouble figuring out how to set everything up legally to make it fair for both of us.  Should I start my LLC and roll the property into it after refinancing, all the while having a side partnership agreement which outlines the terms of profit sharing and ownership?  Should we start an LLC with both of us on it?  Are there other ways to set this up?  Ideally I want my own company and I would like to use this property to begin my portfolio.  Similarly I would like to plan for future partnerships with him and his family w/o necessarily starting a business with him.

Any advise from someone who has either partnered with someone who provided all the financing and or partnered with someone overseas?  Also, if anyone sees any potential issues with foreign banks and or the way were setting this up please feel free to poke holes in the plan.

Costin I. · Answer

@Colin Youn You might want to read these:

• How to Effectively Conduct Joint Venture Agreements as a Real Estate Investor
• how-do-i-properly-construct-a-purchase-with-a-partnership
• 591376-create-an-llc-for-first-partnership-best-way-to-do-so
• 526244-taking-on-partner-s-and-limiting-our-liabilites

Prepare your partnership with these questions first:

• questions-for-capital-partners/
• real-estate-partnership-questions/
• questions-ask-investment-partners/

If you decide to proceed, I think you should have an LLC formed going in a limited partnership with your(s) partner(s) LLC. There are so many areas where things can go wrong with a simple partnership, and you want to be protected from an asset protection perspective. I can provide you with more info on that and give you a referral to a good attorney specializing in asset protection and partnership structuring.

Before you can start to set up the legal framework, there are various issues that need to be addressed. These can be summarised as follows:

• What are the objectives of the joint venture?
• General trading principles
• What will the business actually be doing
• Who puts what in?

• cash
• other assets
• services

• Are any existing contracts of either to be taken over by the joint venture
• Who actually does / will do what
• Will any external funding be needed?

• who will it be raised from
• who will borrow it
• who will guarantee it

• Who gets what out?

• sharing of revenue profits or losses
• sharing of capital gains or losses
• is any payment to be made to either other than as share of profits, eg for ongoing services
• will the participants be operating a ‘salary/dividend split’ – ie taking their month by month requirements by way of low salary, balance as dividends?

• What, otherwise, will be the policy in relation to dividends – to what extent is it intended to distribute / retain surplus profits?
• Who controls what?

• responsibilities for day to day running, in all relevant areas of activity
• tactical decision making (day to day)
• strategic decision making (longer term policies)
• what things can only happen if both parties agree
• what will happen if you can't reach agreement on some major issue - ie deadlock

• What happens if either party 'wants out'?

• on what kind of notice will this be permitted
• does the other have 'first refusal' to take over the whole venture? - if so, on any favourable terms?
• To what extent will the parties be free to carry on other businesses while the joint venture subsists if one party pulls out

• Is it intended that spouses/partners should also be shareholders, to allow for tax advantages from a broader split of dividends?
• Is there a vision that any others will become shareholders (or be granted grant options to acquire shares) in the company in the future?

• Who?
• Staff?
• Others?
• On what terms?
• Participation in dividends?
• Voting rights?

• Are there any offshore angles:

• Is there potential for overseas sales or operations?
• Does anyone involved in the venture have any overseas connections?
• Does anyone involved in the venture have any plans to live overseas in the future?

• Is there yet any written:

• business plan?
• marketing plan?
• cashflow projection?

• Is there an ‘exit strategy’? If so, what is it – which of the following most closely hits the mark?

• ‘lifestyle’ business – ie simply intended to be run by and to provide an ongoing source of work and income for the proprietors, no clear vision for the long term future?
• possibility of future sale at some point?
• A core object of the venture is to create an asset with a view to sale or flotation in 5 years?

• Which aspects of the above do you feel most important at present? Which aspects concern you most?

Account Closed · Answer

@Colin Youn Definitely consult with your attorney but the easiest way to go about this would be just creating an LLC in which you guys are 50/50 partners and managing members. Get a strong operating agreement drafted that outlines the purpose of the business and your individual roles in detail.

Take it one at a time and grow from there!

Basit Siddiqi · Answer

@Colin YounYou should consult with an attorney on structuring the partnership/LLC.This appears to be a partnership as you are looking to split profits instead of a loan agreement where your friend is looking for interest based on capital. The good thing about a partnership is that it can have any profit/loss allocation and terms so long as all the partners/members agree to them.I am sure your friend will want to be on the title of the property so his rights are protected.One thing to consider is that there are laws/regulations regarding foreign money. Banks have to do their due diligence to make sure the money is clean. This is a heads up when the funding time comes.You likely need to reach out to some portfolio lenders if you plan to obtain financing through an LLC/Partnership.

Daniel Dietz · Answer

We just set up an LLC VERY similar to what you are saying. You got good advice from the guys above.

IF you want to 'split profits' instead of borrow money from him, you have a business TOGETHER. There is nothing wrong with that, you can always do deals on your own in the future too.

My now 3 partners (two long term and a new one on the latest deal) how things in 7 differnet entities to make it all work. Some singlely, some in cash partnerships, some in retirement accounts fo various types, and the then the latest.

On the new one the 'private money partner' brough ALL the down payment (20%), my other partners and I will do ALL the work, and we will split short and long term profits 50-50. We were out of down payment capital currently, he was looking for somewhere to make an 8-12% return over 10 years or more. It was a win-win.  "50% of something is better than 0% of nothing" as @Brandon Turner is fond of saying.

The LLC give great protection, direction and flexibility also.

Depending on the situation, a TIC partnership agreement could also work well IF there was any thought of one partner buying out the other down the road, but that is a whole other conversation :-)

Dan Dietz

Kristen Ray · Answer

@Colin Youn Thanks for sharing. I would highly suggest speaking with a real estate attorney and a CPA that specializes in real estate. What you should do is based on several factors and is not "cut and dry" or "one size fits all." Have an attorney and CPA work together to develop a personalized asset protection plan for you.

How to Structure the Partnership

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