Portfolio Partnership Deal Structure Need Help

[Eric Swint]

Need some help wrapping my head around an opportunity, as well as making sure this partnership is a fair deal. I don't know what I don't know.

I have a partner that wants to purchase 2-4 unit multifamily properties with a line of credit. I find and structure the deals using very conservative numbers in the BP calculators that cash flow nicely. The properties would then placed in an LLC where he is considered 100% owner (I would have first right of refusal). The P&I on (20yr fixed) will be paid to my partner. He receives an interest rate of 8% from me, his interest rate to the bank is 5%. He does not want to be an active participant in these deals.

I manage and renovate the properties for a 8-12% of rental income fee depending on the property with the expectation that these properties are to be transferred to my LLC at a 7 year balloon mark. The 25% down payment he supplied through his credit line for the initial purchase will be nearly payed off (+ interest) at this point.

This is where I'm having trouble understanding. I feel as though I'm missing some key pieces of information to make this partnership work.

1. Will I refinance through the lender to a new 20 year fixed conventional mortgage?

2. How do I obtain ownership of all the properties acquired? 

3. Is it possible to be included on the initial LLC to simplify the property transfer process?

4. What else am I missing here? Any and all questions and observations welcome.

[Derek Dombeck]

Eric,

In order to protect yourself, you need more than a first right of refusal. The best way is for you to be a part owner of the LLC right away. If you are not, at the seven year mark, the property would have to be sold to you, which most likely require you obtaining new financing. This would be a taxable event for your partner. Or, you could buy the LLC from your partner on a payment plan. Depending on the loan structure and the bank used, the existing financing could stay in place.
If you move forward without ownership in the LLC, structure a lease with an option to purchase to protect yourself in the deal. The lease give you use of the property and the Option prevents your partner from selling to someone else.  Be sure to learn the dos and don'ts of Options and record them on public record.