All Forum Posts by: David Gotsill

@Ekow Essel - Welcome to BP, and good luck with your partners.

I'm obviously biased, as an attorney myself.  With that out of the way...

You might be able to rely on a professional service that can assist with setting up the LLC and preparing basic documentation, including the operating agreement. There will be multiple vendors in every state that do this, and chances are you could find one that has a form of Operating Agreement close to what you want/need. This would be a cheaper approach at the outset.

But like @Kathy Henley says, you may be better off counting the costs of an operating agreement among your start-up costs, and being confident that you're doing it in a way most likely to have fewer problems down the line (nothing is bullet proof).

One key thing to recognize is that the attorney is helping you predict potential future problems and plan for them now; but he/she is not deciding anything for you.  You and your partners should decide upon the key elements of the deal, including (IMHO):

• Ownership percentage: who owns how much.
• Contributions: who is contributing what (and how much); what are obligations, if any, for future contributions (for example, it's common for an Operating Agreement to say that the partners each contribute $X at closing and have no obligation to make any future contributions.  This is a poor approach in real estate, since you want to make sure to avoid a situation where the real property could be subject to a tax lien.  Instead, the Operating Agreement might say that no member has any obligation to make future contributions, unless it's to avoid a tax lien.  Just as an example.).
• Management: who makes what decisions (e.g., does a certain person act as manager for mundane decisions (like what color to paint the door), while other decisions need majority (like getting a new roof) while still other decisions require unanimous consent (like selling the property)).
• Distributions: who get's distributions, and when.
• Sales/Transfers: Life happens, and people change their minds.  Can one partner sell out?  If no, what happens if one want to quit?  Are they stuck? Can they force the sale of the real property?  

If you and your partners have agreed on the above, and other key considerations, it should not be that much work for an attorney to prepare your operating agreement.

Again, I'm biased and I'm sure there are plenty of successful partnerships that were fine without an Operating Agreement vetted by an attorney.  But how many unsuccessful partnerships wished they'd had a better Operating Agreement once "things" hit the fan?  Maybe just think of it as insurance.  Hopefully you never need it.  But if you do, boy are you glad to have it.

Good luck!

@Joe Potenza -

I agree with @John Blanton and @Todd Dexheimer regarding the parameters and expected fees.  

It probably goes without saying, but LPs are going to be vetting you and team as people as much as they vet the deal. More so, even, if they're new to REI. If the LP has other investment options, I think they're more likely to choose your transaction over another based on their relationship, confidence and communications with you and team rather than a difference of 1% pref or projected IRR. At least I would.

Of course you want the deal parameters to fall in place, but not at the expense of making a real connection with your potential investors and a thorough explanation of your team.  

@Paul Winchell - 

Seems like a complicated situation, with some nuances that you may have to look into further.  

I'm not sure I understand the suggestions so far. Is it that: (1) LLC A holds title to new properties and LLC B owns LLC A; you and the trust are members of LLC B; OR (2) Trust holds title to the new properties and your LLC serves only as a manager; OR (3) LLC holds the new properties, and you and the trust are both members of the LLC?

As an introductory matter, I would want to ensure that the 1031 rules are followed.  I'm not familiar with those rules, but at a minimum you'd want to ensure that it's OK for the trust to do something other than directly hold title to the new properties.  If no, then you reduce your options among those above, and you're left with (2).  If yes, then as between (1) and (3), I see (1) as potentially advantageous if you're going to have many separate deals for which you want to limit liability (either because you're worried about lawsuits or because you want to arrange for mortgage financing).  Drawback is that (1) is more complicate, more costly.  

Another question, are you going to have an ownership interest in the new properties, or just be paid a management fee?  If ownership interest, then I would expect you and the trust to be members/partners of the same entity - so not option (2).  

Thoughts?

@Justin Duran - 

I think what you're asking is, if you show proof of funds in one name (presumably your name), will that limit your ability to assign the contract to another buyer of a different name (for example, you are wholesaling or do you intend to acquire as an LLC)? Is that it?

It's all going to depend on what's written in the contract, but as a general approach I would think not.  I'm guessing the agent is looking for proof of funds just to be sure you're not toying with him.  I haven't heard of an agent looking for proof of funds before (lender, yes; title company, yes). 

If your purchase agreement allows you to assign, then that should not be effected by proof of funds.  I might worry, however, that if the seller thought you were trying to pull something over on them (I'm sure you're not - but it's not clear from your question what it is you're trying to do), then the seller could become uncooperative.  

Good luck!

@Aaron Ta - 

I'm not an expert on this, but it's my understanding that the 12-month period is keyed to the timing of the loan.  In which case, refinancing would restart the 12 month period.  

As an additional point to consider, some lenders require occupancy certifications, where the borrower essentially certifies (promises) that she/he intends to live in the property.  These can vary in terms of length.  

One other nuance may be that, although difficult to evidence, intent is a key component. That is, if you obtained owner-occupied financing with the intent to live in the property but later (even less than 12 months later) had to move (for example, for a new job), then you're still OK.  On the other hand, if you ha the intent to make it a rental, then perhaps owner-occupied financing would not apply.  Again, hard to show intent, so actually living in a property for a year would likely cover it.

@Jamila Thompson - 

While I have no trouble understanding where @Moises R Cosme is coming from, I'm a big proponent of partnerships, both formal and informal.  If you have good answers to the questions that Moises poses, then a partnership could be good for you.  Some thoughts for your consideration:

Partnering on a deal can definitely be a good way of getting acquainted with multifamily. Is it better than doing a small deal on your own?  That depends on a lot of factors, such as whether you'd have the ability and gumption to go into a deal alone; the quality of the deal itself; the attributes of your partner and yourself, to name a few.  There is no one size fits all answer.

I think you find your partners in much the same way you'd find friends or (the other sort of) "partner".  You build trust over time with repeated interactions.  I met my two key partners here on the BP forums, where we discovered shared interests and goals.  Some of the best advice I could give would be to continue to be active on the forums, and to extend those connections to phone calls, video chats and (virtual?) coffee.  

One question I ask myself before partnering on a deal is "What can I bring to the partnership?"  In the beginning, my answer was limited.  As I gained experience, my answer changed.  You're out there looking for a partner or partners, and in the end will have to take a chance with someone.  At the same time, they take a chance on you.

You ask "what makes a potential partnership beneficial for me?".  Isn't the answer simple - if it puts you in a better position than you would be without the partnership?  That could mean it allows you to learn something new, to get into a particular market, to get involved in a bigger deal, or any number of other things.  If instead you're asking whether a particular partnership is the best possible choice for you, that's not something that we can answer.  Some of the points that @Filipe Pereira and @David Lilley touch upon can help you ensure you're covering your bases.

Speaking personally, here are some key reasons that I chose a partnership (and will continue to do so): (1) I like my partners, as people.  We get along on a personal level.  Sure, we have some differences in investment goals and risk appetites, but we have been able to overcome these differences (*knocks on wood*) because we get along; (2) We have different skills and interests, that as a whole allow us to compliment each other; (3) Scale/Share the burden.  I would be unable, due to limited capital and limited time, to handle a "big" deal.  Big means something different for everyone, but in my current situation, I would have trouble getting beyond a 4 plex on my own (and with partners I've been able to 4x that); (4) Motivation.  This may sound silly to some, but it's absolutely true for me.  Having partners keeps me motivated and accountable.  I was a long time runner, and the years that my training suffered were when I moved to Japan and lost my training partners.  I train more and more consistently with other runners.  Same thing here.   

Which is all a long-winded way of saying, Welcome to BP!  You're already on the right track, and good luck.

@Daniel Huffman -

Yes, I think that getting the right team would help you answer these questions.  I'd encourage you first to be active on these forums, and in short order I think that you'd have a clearer idea of what you want to do and when speaking to an attorney or CPA would be useful.  

You and I aren't the first to partner with others for a deal, and certainly there is an abundance of information related to partnering up here on the forums.  It can be challenging to sift through it, but in the end you'll be better prepared to move forward than if you had begun by speaking to professionals.  When you do decide to speak to those professionals, I would suggest you approach CPA/Attorney with the idea that they can first help you drill down to the right questions, and then once YOU decide, they can help structure.  

In short, it's no secret that I'm a huge proponent of these forums, so best advice is to stay active here.

I again want to share my gratitude for the BP community.  My partners and I closed on a 27-unit value-add multifamily portfolio in Huntsville, Alabama.  The closing was mid-May, after some delays from our lender due to Covid-19, and we're already on a trajectory for a solid deal.  

Most of our partners are people that we met right here on BP, and I'm constantly amazed at the potential of this forum to connect like minded investors, share critical information and ideas, and ultimately lead to successful transactions.

With that, thanks again, BP community!

Dave, BP fan (I'm sure there are many others)

@Daniel Huffman -

Congrats on that first post.  Despite not knowing about your specific situation and not being versed on Texas law, I can perhaps share a few thoughts.  

From 10,000 feet, you and your partner will either each directly own a portion of the property, or you will own a portion of an entity, which in turn owns the property.  

The former would typically be accomplished through a tenancy-in-common (assuming that's available in the jurisdiction in which the property is located).  As tenants-in-common, you would each directly own an undivided 50% interest in the property.  (Not a tax specialist, but it's my understanding that...) You'd be taxed on your 50% interest just as if you owned the property yourself.

For the latter, common entities would be a general partnership or an LLC. Most investors prefer LLCs because LLCs can shield the members from liability, which is not the case in a general partnership. Happy to elaborate on this point if it'd be helpful. (Again, not a tax specialist, but...) I believe with an LLC you have tax options, and can elect to be treated as a partnership for tax purposes (in which case you're taxed on your 50% interest, same as above), or elect to be taxed at the LLC level. In most cases, I believe that 50-50 partners elect to be treated as a partnership for tax purposes, but there may be nuances with which I am not familiar.

If you guys are planning to finance the purchase or look for a cash-out refi (presumably the case if you're BRRRR-ing), then you might want to check with a lender or two, for general restrictions as to how a property must be held. For example, in a recent transaction I did with a few partners, the lender required that the property be held by a single member Delaware LLC. So, we had to have LLC 1 as the property owner, with a single member, which was LLC 2. Then the partners and I were members of LLC 2. Because we were discussing with the lender from the early stages, we set it up as we went along, and didn't have to re-do or re-structure anything.

@Michael LemMon

I’m not sure I fully understand your question, and it may be helpful to consider 2 related concerns: first, how will you own (hold title to) the property, and second, how will you operate.

The first concern is whether you hold title together, as tenants in common, or through an entity, like a partnership or LLC. This decision dictates your rights to and interest in the property.

The second is how you and your partners agree to operate the property. This sets forth your rights vis-a-vis each other. This question is related to the first concern. For example, if you're setting up an LLC to hold title, then for this second concern you'd want an LLC operating agreement. If you're holding title as tenants in common, you'd want a Co ownership agreement or TIC agreement.