What to Think About When Structuring a Deal with Partners

There are many different ways to structure a partnership. It would be great to have one way to define exactly what steps to take to execute the structure of the partnership; however, there are multiple people involved that may want to perform the deal completely different than another member. Differing thoughts is what can make or break a partnership.

What, Where, Why, and When

As the group is gathered together to combine their money and invest the money into a property, there can be a lot of different thoughts about what property to buy, where to buy it, how to invest the money, or when to take the money out and put the money into something else. Due to these common occurrences with multiple people involved in a deal there tends to be a lot of objections, and these situations are the perfect examples of why there should be an entity setup with a specific operating agreement in place.

In the operating agreement, there needs to be many different items discussed by the primary partner, or managing member of the deal. The managing member of the investing group will essentially be the CEO of the company. As the managing member her goal would be to define the roles of each member involved. These members are majority investors that have a lot of capital invested, to a board of directors, or a minority investor that is only investing a small amount of money. All of these positions should be covered and talked about within the operating agreement in detail.Related: How to Structure Syndicated Investor Deals: What Kind of Legal Entity Should I Use?

The capital that is being invested by the investors and the managing member needs to be outlined in the operating agreement along with the returns on investment for those investors. These two aspects need to be spelled out for the investors to make sure everyone knows what they need to contribute to the deal and what they will get for their return on investment. There should be information within the operating agreement in regards to the returns and if the company, or managing member would be guaranteeing those returns or if they will be investing at their own risk.

Timing is Everything in Real Estate 

Time is everything, especially when it involves investing. The timeframe of the investment for the investor needs clear verbiage in the operating agreement. This gives the person investing the mindset of how long that capital will be locked up until the money is liquid again. The capital for the deal that the investor puts in will be what is locked in; however, the ROI to the investor can be a monthly, quarterly, or annually payout depending on what all the investors agree upon.

Related: Passive Real Estate Investments vs REITs

Operating agreements are something that should be drafted by an attorney, and should not be drafted by one person in a large investment group since the sensitivity of the deal is very high and the large liability of the investment. This operating agreement is a map for the managing member, attorney that will be assisting the group, and the investors in the group. It is a map because it will guide every party involved throughout the lifetime of the investment, and it will give guidance if there are objections by the groups’ members.

In any deal that involves partners, it is best to spend more money on the professionals upfront than have to return back to the drawing table to fix an issue that was not agreed to in the operating agreement. The upfront costs will incur a lot less expenses than a deal that goes bad.

What ways have you structured a deal?