I am investing with two partners (for a total of 3) and am wondering what type of legal structure I should utilize to ensure liability and financial risk are shared equally among partners with varying levels of net worth?
Not legal advice, this is just what I’ve done.
For simplicity sake, I’ve divided the transaction into 2 parts.
The $$ partner and the deal partner. Your mileage may vary.
In the case of the $$ partner, they hold the mortgage/TD.
The deal partner takes title to the property. Seek out professional advice as to how to take title.
I’m not qualified to give that advice.
Its money well spent.
The details of the profit split are contained in the note. That keeps it private. Its NOT recorded.
But the mortgage/TD is recorded – which protects the $$ partner.
Here’s how we did our last one – the $$ partner put up all the $$. They received a preferred 10% and half of the net proceeds upon sale.
I got the rest.
Benefits to $$ partner: NO MANAGEMENT, Tax deferred income upon sale via 1031.
Benefits to me: no capital out of pocket, everything over 10% on the partners’ capital and 1/2 the net profit upon sale.
To paraphrase, “So simple, even a real estate agent can do it”
Agents - don’t hate on me - its a joke!
Bottom line – we both did very well.
And continue to do business with each other.
Keep us posted,
Quick question; when you and your partner decide to sell, isn’t the only one on title allowed to take the 1031 Exchange (tax deferral) on the profits? I’m just curious as my new partner and I are trying to work something out that is similar to this…but working on the details with our CPA and 1031 exchange company. We are trying to structure it correctly so both of us can defer taxes should we choose to go our separate ways once we sell. If we hold the partnership and title to the park in an LLC, to my understanding that LLC can only take a tax deferral/1031 exchange on a replacement property. This could be a problem should one partner wants to cash out and the other wants tax deferral.
I’m just curious what people have done regarding this…
Sorry, I may have confused some with my VERY simplistic model.
You are correct to work out the details with your CPA & exchange company – and this is crucial; BEFORE you take title. As I said in my previous post, consult with a professional. As you are.
You can also have the $$ partner and yourself own their respective LLC’s which could be co-title holders.
So you’d own a share and your $$ partners would be ‘on title’ as well as their receiving the income from the note/mortgage/TD.
Thanks for bringing that detail up for others.