How do you decide equity split when someone brings you a deal?


#1

From time to time I find off market deals that are a bit out of my price range. I have the funds to cover the earnest money and get it under contract complete DD and then I need to look for an equity partner to provide the capital for down payment and improvements. I’m curious, how do you guys decide what the equity split would be in this scenario?

Let’s say partner A finds the deal, puts down the earnest money deposit, and wants to stay on to do the operations work/park turnaround stuff and partner B also wants equity ownership and has the cash but doesn’t necessarily want to be very involved in the day to day affairs. Let’s say that the deal is in the Charlotte, NC MSA and the park has 100 lots, 90% full and lot rents $60 below market with public utilities. And no major issues with DD. How would you structure the deal to be win-win for both partners? What percent of ownership would you typically assign and would you use any kind of preferred return in this scenario?

Using the above example, would the split be significantly different if partner B wanted to be very involved in the day to day activities? Thank you.


#2

I would suggest 50-50 as a right start but who knows. Who has more bargaining power? If the money partner is also bringing the experience and management, you’re not really adding much value by sourcing the deal. 90-10% in that case?

I’ve not done this, but one way to view it is consider what you would expect if this money partner gives you a loan for half of the required equity (down payment & startup capital) and you go in as equal Partners on the money side of things with a side deal which is at whatever interest rate and terms you bargain out.


#3

DaveM,

Remember, there’s a lot of smart people here.

And Brandon makes some very good points.
As usual. :slight_smile:

This question appears in several variations on this forum.
One answer is – how much does a bag of groceries weigh?
It depends.

Its sometimes better to be specific and get funded than chase some hypothetical discussion.
Let’s say you have such a deal – what are you offering?

I sometimes have 1031 funds available.
In addition, many members on this site have the $$ and experience to close a good deal.

Let’s all put our heads together,

Mike Weiss
mweiss1031@gmail.com


#4

I see your point and tend to agree. If The only thing I’m really doing is sourcing the deal and doing a little bit of operations, 90-10 would probably be reasonable. That being said, if the deal really was killer, I would try and get more since I can always shop around for partners if it is a good enough deal. Again, this is just a hypothetical.

I think your idea of “getting a loan” from the partner is very interesting as well. I haven’t considered that before. Thanks for the responses.


#5

I have discussed doing a partnership where the other partner would put up all the money and consider it a loan for my half of the down payment and startup capital and then with me being the working partner in the deal since I have experience but not investment money right now. Since, in that scenario, the initial outlay is a loan to be paid back to the money partner would you think the working partner should get any compensation above their 50/50 for being the turnaround and operations management person?


#6

Sure, why not? 20 chars.


#7

As others have stated the true answer is “it depends”. It depends not only on the variables of the deal but also on your personal preference. I have looked at partnerships on some parks but its personal preference of mine that the other partner must have financial skin in the game also or I’m out.


#8

@WhiteTrashGator

I get that side of it too. Every person is probably going to look at this scenario a little different and I’m glad to see there are some different answers. When you say some “skin in the game”, what would be your minimum threshold to consider partnering with them?


#9

@DaveM
This scenario sounds like a Double more so than a Home Run find.
I’d want a 10% finders fee then add my cash contributions.
Then I’d want a 5% management fee with a $2500/mo minimum.
I’d also go for a 60-40 Appreciation split. That way you get paid more for doing a great job!!

You could also add a minimum return to Partner B’s side. For example; If he puts up $100K then he is guaranteed an 8% annual return before you get your distribution.

There are 100 ways to skin this cat.


#10

I think it’s helpful to separate contribution of capital from ongoing operational responsibilities.

Capital
Any cash invested by either partner could get paid a preferred return (8% or whatever is agreed upon). This is paid after expenses (including management) and reserves, but before any profit split. Then any profits available after expenses, reserves, and the pref, gets split 50/50. Or maybe 55/45 or 60/40 if one partner found an off market deal and its a really good one, or there is some other very exceptional circumstance.

**Sidebar Regarding Percentage Splits:
It’s helpful to keep in mind that there is a HUGE difference between 50/50 and 60/40. It’s not a 10% or 20% difference. The 60% partner is getting 50% more than the 40% partner. In other words, 60 is 1.5 times 40. So in a 60/40 split, for every $1 the 40% partner gets, the 60% partner gets $1.50. That is a big differential. So be careful what you agree to!

Operations
If only one partner is taking an active role. Then that partner’s ongoing efforts, time, labor, should be compensated through a percentage management fee. IMO asking for a minimum $ amount is nice for that managing partner, but not for the passive partner. If the park doesn’t generate a high enough dollar fee at 5%, then I’d rather just raise the percentage until it’s a dollar amount that works for everyone (when the park is running as it should be). An owner manager should be under pressure to perform and keep the park operating well just like a non-owner manager. That’s why performance based compensation is so popular- Do a good job, you make more. Slack off, and you make less. Having a minimum guarantee removes some incentive and motivation, and can make the non-managing partner feel like they are being taken advantage of if the park isn’t performing well. If it’s a turn around or there is a rehab period, then the fee could be higher during that time, and once certain benchmarks are met, it would go to a normal rate. IMO, the incentives should be structured for the mutual benefit of all investors.

Those are my thoughts. As SDGuy says, there are 100+ ways to do this!


#11

@SDGuy and @jaydub thank you both! Those were very good answers and definitely gives me more to think about. And Jay I tend to agree that a minimum dollar amount isn’t necessarily win-win. I’d have no problem just taking the 5-7% management fee since I know I could make the park run smoothly.


#12

Dave, This sounds like the kind of deal I might be interested in. If you are still looking for equity, please email me at frankabrahamson@yahoo.com.
thnx
Frank


#13

@DaveM @jaydub Your ideas on possible splits and structure are very good.

Minimum Management Fees
I have been the managing partner on significant turn-around situations with and without a minimum management fee. Depending on the size of the turn-around needed, I believe a minimum fee is the best and most productive way to go.

If there is a sliding percentage fee, then there is not as much incentive to get the property stabilized and meeting projections because as income improves, the % of that income goes down. Having no minimum is also a burden because the hardest work happens in the first 6-12 months. Just make the minimum low enough so that there is little motivation to stay there.

I feel lucky to be a part of this forum with so many smart contributors.


#14

With a split ownership, this is what we do:

We ask the investor to bring 1/3 of the funds to the table (+ capital for expansion) for 1/3 of equity in the deal. We create a new entity for each new MHP asset (and subsequently, a new bank account).

The new partner has now 1/3 of the shares in the entity; thus 1/3 partner and 1/3 owner. This new entity purchases the mobile home park.

We will typically bring in 70% with financing to the closing table, which is personally guaranteed by myself and my business partner.

We manage the parks and all properties so this partner is ‘silent’ (aka. they are not involved in the daily operational activities).

They get 1/3 of collected rents (although, during stabilization phase (aka. after we have bought the property), we ask all partners to leave the monthly returns into the company so they can be reinvested into the property-thus increasing occupancy and value).

In 2-3 years time, once the property has been stabilized and has increased it’s value, we refinance the property. This is where it gets interesting.

The original 1/3 investor gets their initial capital back and all partners split the remaining $$ from refi (if applicable) - tax free.

From there, our equity partner has gotten back most (if not all) of their initial investment capital back (and some…), extra money from refi (if applicable) and they continue getting 1/3 of profits for life.

If we sell, this partner gets 1/3 of the selling price, as they are 1/3 partners for life.

Our partners are ‘silent’; however, they do have access to the bank account and have access to a property specific Dropbox that includes everything property related.

We can share P&L’s and other documents if they request it or they can simply follow the progression of stabilization and management of the property on Dropbox-live.

All our MHP are professionally managed by a professional management company; they hire an on-site manager to help them with the day to day operations.

We are very transparent with our partners.


On another note, if the potential partner brings in 100% of the purchase price (and capital for expansion), we split 50-50%. Same outlay; we create a new entity and become equal partners.

Everything is very clean.


We only buy double digit caps. In fact, we haven’t bought anything under a 15 cap AS-IS, so our partners are most happy with their returns they are getting. We are great at negotiating off-market deal and have a great team around us. :wink:

We purchase mostly in the northern mid-west; Michigan, Ohio, Illinois, Indiana, Montana; we are not married to any specific area.

It’s a true win-win.

If you’d like information, feel free to reach out: wemindji.properties@gmail.com


#15

@GMG and @Wemindji_Properties

Awesome answers! I think I’ll probably go with some mixture of the two. Thanks!