Fair way to structure split ownership on a no-money deal?

[Aaron Mikottis]

Hi BP. Tomorrow I am closing on my second no money deal! This was one of those "I found a good deal, now I need to find money" deals, proving the old adage right that if the property is good, the finances will follow,

Unfortunately, some of the terms between me and my private lender still need to be worked out. The seller and I have a trusting relationship, so we are going to resolve this through the terms of an LLC that we are setting up after closing. My partner is providing the cash for the purchase price ($59k) plus up to $9k in additional funds for rehab. The agreement is that $35k of that cash will remain in the LLC as my partner's equity, the other half is a short term loan. My plan is to pay him back with a cash-out refi in 6 months.

 Here are the terms of our agreement as they stand:

Roles in the company:

Aaron acts as the asset manager. This involves:

• Running marketing campaigns for deals
• Studying local markets
• Understanding rehab costs and ARV
• Making many, many offers on new properties
• Negotiating with sellers
• Negotiating with banks and private financiers
• Networking with other investors, contractors, aldermen, etc
• Managing the closing of deals
• Calling the shots on value-adds and rehabs to existing assets
• Keeping the books
• Creating quarterly reports
• Setting up systems to help automate tasks
• Acting as spokesperson / point man for portfolio

Unnamed partner acts an equity partner. This involves:

• Providing capital in a timely manner for pre-approved deals.

Ownership is allocated in the following way:

• The asset manager owns 20% of each property.
• The other 80% is owned by those who provide the financing for the deal, with no distinction between leverage and cash.
• Partner’s percentage of interest in the company is the net percentage of capital contributed across all properties, multiplied by 0.80.
• When new assets are added to the company, percentage of ownership is recalculated.
• If cash infusions are required for major improvements not covered by reserves, we recalculate percentage.
• Distributions are paid quarterly based on profits, on the 1st of the month, based on a percentage of ownership.

Now here comes the question: 

If I cash-out refi the property, is that my capital contribution, or his? I was thinking that it was mine because I will be personally on the hook for the loan. But the property is collateral and he owns part of the company. What is a fair way to structure this?

Thanks for the input!!