Structuring a Flip/BRRRR partnership

[Russell Holmes]

I'm hoping to get some big picture advice on structure here, pros and cons of different options, etc.   I already have plans of meeting with an Attorney well versed in land trusts and Real Estate partnerships for the finite details and any state-specific legalities.  I'm sure he'll have advice and could cover the basics, but I wish to gain some clarity on basic structure to get more value out of our meeting.  The less basics the Attorney needs to explain, the better!

I've been a Realtor a little over a year, most of that time having to split my time with another service business I started in 2007 as I've transitioned more time to RE over time.  I'm finally moving away from my other business and into full time RE.  I've sold a handful of houses and made a ton of networking connections.  I've got a three properties actively listed and two rehabs ongoing for clients to sell when complete as well as one in escrow for a buyer, other buyers searching, and a few listings I'm nurturing for short term future sale when ready.  One flip client is an experienced flipper and living out of town, so I'm his boots on the ground while he's got the decisions handled. With the other client, this is his first flip so he's been consulting with me on many of the choices (which I love!).  Having not flipped any before on my own but being quite knowledgeable on construction practices, I've jumped at the opportunity to research products, look at rehabbed comps in person and online, talk to contractors and other investors, and come up with some great options.  So far I've picked or helped pick the paint colors inside and out, cabinet hardware, half bath layout, granite, laundry layout, and we're going to pick flooring and appliances together this week.  

Due to the debt from a previous divorce I'm still digging out from, I'm unable to bring capital to the table at this time and had thought I'd just be a helpful Realtor until I'd built my own seed money after squashing my debt. I'm not tracking my hours on this flip I'm helping with, every moment is an incredible education that hasn't cost me a dime. 

I've kept my options open along the way knowing I wanted to do a mix of traditional MLS sales for the income and go down any investing path that opened up to me. That being said, I was still shocked when this flip client offered to form a partnership to flip and BRRRR properties moving forward and to share a quarter of the profits from the current flip with me as well. We've discussed 'how' we want the numbers to work, but will be working with an attorney to hammer out the details of how to structure it legally.

The basics we have discussed:

-Properties will be held in a Land Trust, one for each property, to protect us both.

-Capital will be 100% from my partner. None from me, and no outside capital to start with

-If we BRRRR a property and recover all of his capital, we'll own it 50/50. If he leaves some in, he'll own that percentage of appraised ARV and we'll split the remainder of ownership/profit share.

-All sales and listings will be through my license hung with EXP Realty, my partner isn't licensed. We won't be forming an entity for brokerage at all. There are some restrictions and costs implemented by my brokerage for agent-interest properties that may eventually encourage a switch to a flat fee type brokerage, but for now it's workable. Nothing unreasonable, just brokerage liability concerns for extra caution (pre-list home inspection, no permitted work done by me regardless of qualifications, stuff like that). I still may end up keeping up an MLS-based transactional business outside of these projects so I have to weigh the pros and cons of brokerage over time. My gross commissions will count toward my profit share so my brokerage expenses will be shouldered by me and not shown on our partnership costs. In time, I will shift over to wrapping my commissions into the deal rather than taking them at closing, but this keeps my income and sales volume simple to track as I work to grow both.

My concerns:

-I want to ensure the protection of my partner's capital both when liquid in a bank account as well as when deployed on a property. He's putting a lot of trust in me, so I want to be sure his capital is fully his at all stages. I shouldn't somehow default to owning half of an asset he bought even if we are 50/50 partners on the value-add 'business' portion.

-We'd like to structure it so that deciding to BRRRR instead of sell a property is a choice that can be made at any point in progress without altering structure. We'll be analyzing every deal both ways and are open to flips or BRRRRs

-He's already offered for me not to shoulder any financial risk beyond zero profit (which is awesome!), but I want to be sure we are both protected from the other's potential partnership liabilities, whether intentional or not.  The best example I can think of would be if one of us took out a loan of some kind in the partnership name, unknown to the other (say he went and bought a new Corvette in the partnership name....not likely since we both drive used sedans, haha).  This would then make us both liable for this loan. We both need some freedoms to operate efficiently but there should be inherent checks/balances to be sure the capital is deployed only in the way we both intend, him having final say if we disagree.

-We both agree that I should have check writing abilities to pay contractors and signing ability to submit offers. However, I shouldn't have full access to all of his un-deployed capital (in my opinion).  I've thought of making the partnership 51/49 so that he has majority, but I don't know if this is how to do it in practice. 

I figure there will be multiple layers of LLCs going on here, one I have myself to be paid profits through, one we have the partnership in to make offers and buy/rehab property, and maybe an additional funding one that only he is on?  I figure he would fund the partnership account as needed to make necessary funds available when needed, depositing the recovered capital back into his 'funding' entity.  

With the houses being held in trust, would our partnership LLC be the beneficiary and my partner (or his solely owned entity) the Trustee?

We know where we both stand and what we both bring to the table.  We are pretty clear on those concepts to come up with a partnership agreement, but the understanding gets a bit foggy in how to actually execute the legal business structure.  At first we will be doing one property at a time with cash.  However in time, I may start putting capital in for a higher split, we may bring in outside investors, hard money, or even other partners. 

Would anyone care to enlighten me on the legal structures you've used when one partner brings the cash and part time involvement in the deal while the other makes the deal hunt, analysis hustle, and project management their full time gig?   In asking around at a local BP meetup for information, I had another investor I've known awhile mention wanting to possibly do the same thing with me for BRRRRs, so now my need for understanding is two-fold.  I'm absolutely thrilled at the opportunities so I want to be sure to enter the partnerships on the right foot!

Thanks for any insight anyone can provide!  And no need to worry about state specific advice, I will be running everything past a FL attorney for confirmation, just looking for high level theories and ideas here so I'm not a total newbie when I sit in front of an attorney and published author :).  Thanks everyone!

[Steve Hall]

@Russell Holmes

1. You are not ready for this yet. You are wise to consult with an attorney. I would love to hear the legal advice you receive.
2. You are confusing a partnership with a joint venture (JV). Even some experienced investors don't know the difference. Never partner... always JV.
3. Very few BRRRRs ever recover 100% of the capital investment. The more you both spend on the property and the more you spend on the rehab, the lower equity position you will end up with. (See the conflict here? The bigger the checks you write, the more you're cutting yourself out of the deal!)
4. Land Trusts in Florida do not offer any "protection". They are for estate planning and anonymity. 

You should form a holding company (LLC) in DE, NV, or WY, and the holding company should own a FL holding company (LLC). The FL holding company will be a member of a new FL operating company (LLC) which has 2 members, your FL holding company and his FL holding company (or him personally is he so chooses.)