How can I structure my investors so that they are not on the building note? [more info in comments] [xpost from r/realestate]
I'm doing a redevelopment project and I am bringing in some investors to help me cover the large downpayment for the mortgage. The investors do not want to be on the note with the bank so that they are not liable to the bank should the project go into default. What kind of legal document or ownership structure is available in a situation like this?

I have seen deals where the developer will sell "units" in a project for, let's say, $50K each. Each of these smaller investors does not end up on the note. How exactly is this done? I'd like to research it and forward the info to my attorney that will be handling the deal. Thanks!

[{"id": "d392e9f", "text": "An LLC or limited partnership structure should work for your purposes.  The entity will be the borrower, presumably you would be the guarantor and your investors will be shielded from liability to the extent of their downpayments.\n\nI'm not familiar with the \"units\" concept but it sounds suspiciously like a TIC which has its own complexities.", "replies": [{"id": "d393dl4", "text": "I tried this. The bank said that anyone listed in the purchasing LLC would be a full guarantor and fully liable.  I have been talking to a 30% investor but their attorney scared them off because of this. What are your thoughts?", "replies": [{"id": "d394zi7", "text": "Really?  My company uses LLC structures all the time and the only guarantors are the partners here.  The whole reason structures like LLCs exist is to protect silent capital.  And you aren't a guarantor unless you sign guaranty documents.  Otherwise, there is no guaranty.", "replies": [{"id": "d3c2jsz", "text": "its not because of the legal structure, its because of the risk associated with the transaction. i've grabbed related companies as co-borrower and guarantors before in order to shore up cash-flow on under-performing properties. ", "replies": [], "depth": 4}, {"id": "d48na5e", "text": "Legal structure has nothing to do with it. The bank can and often will insist that the sponsors sign a guaranty notwithstanding the shield that the LLC may provide them. Look up the difference between recourse and non-recourse debt.", "replies": [], "depth": 4}], "depth": 3}, {"id": "d396r4q", "text": "I should add that the bank may require your investors to sign if they don't feel that you have the financial wherewithal to be the sole guarantor.  But I don't think the investors will be a guarantor unless they specifically sign a guaranty document.", "replies": [{"id": "d3aa0ox", "text": "Yeah, I think this is the crux of it.  I think I may be borderline solid enough for a deal this big.", "replies": [{"id": "d3al1g0", "text": "Threaten to walk then. You'll find out quick if they think you are strong enough. Multifamily lending is slowing down some, which could also be the reason they are looking for a better guarantee- they could be over exposed.\n\nYou could also give a piece of your equity away to one of your investors in exchange for a guarantee if it makes sense for your deal.", "replies": [], "depth": 5}, {"id": "d3e6fzs", "text": "Also, they want the guarantor to have some skin in the game.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "d39j1e9", "text": "This is something the bank is requiring in response to risk, not an absolute thing. In other words you don't necessarily need a guarantor but in this case it looks like the bank is requiring it.", "replies": [], "depth": 3}, {"id": "d39rt7z", "text": "It's not a function of the legal structure. It's a function of the lender's risk tolerance. If you do not have $, your guarantee is worthless. If it's a substantial rehab, you will have a tough time getting a non recourse loan, and again recourse is only worth the person signing it.\n\nYou can tap a broker to find you non recourse debt from another source (i.e. High yield debt fund) if the deal is large enough, but it will be expensive. Probably an 8-10% coupon with 1-2 points and possibly 1 point on the exit.", "replies": [{"id": "d3a9ylh", "text": "I think this is exactly right.  I think I made a bit of a tactical error, I asked the bank if they needed my investor to sign on the loan rather than telling them that I will be the only guarantor.  In other words, if you ask the lender if they want multiple guarantors, what did I think they would say?  I am realizing that dealing with banks, especially on these larger commercial deals, has a lot more flexibility and negotiation than on a simple transactions.", "replies": [{"id": "d3afpar", "text": "Engage a broker. You will benefit from competition and they can guide you on what's market for your loan.", "replies": [], "depth": 5}, {"id": "d3c2f3y", "text": "yeah, this too. if you don't want to add guarantor, don't ask the bank who they want. default response from the lender is gonna be, \"well everyone we can get\". ", "replies": [], "depth": 5}, {"id": "d3deows", "text": "So here's what it would look like: Archibot LLC is the holding entity for the property.  You are named as the managing member of the LLC and therefore have direct control over major operating decisions (as long as the operating agreement of the LLC is structured this way, which is pretty much default for an LLC) and the investor(s) are just members of the LLC.  You can also name in the operating agreement for Archibot LLC how the cashflows are distributed if you want a promoted structure.\n\nAs for the guaranty, I guess this isn't an enormous deal in terms of market value as it sounds like the bank wants the debt to be full recourse.  Normal commercial RE just requires the standard environmental and \"bad-boy\" carve-outs guaranties from the manager on the deal.\n\nBest advice would be to talk to multiple banks.  What market are you located in?", "replies": [{"id": "d3dgxpn", "text": "Thanks.  That's what my attorney wrote up in the OA.  I need to verify the details on that.  \n\nI'm not sure what \"standard environmental and \"bad-boy\" carve-outs guaranties from the manager on the deal\" means.  Can you please clarify?  Thanks.  I'm in ABQ.", "replies": [{"id": "d3i06cs", "text": "I guess technically there are more than one flavor of bad-boy carve-outs and really, environmental carve-outs are part of the all encompassing \"bad-boy\" carve-outs (I used bad-boy in the place of fraud).  They are just provisions within the loan agreement that will shift the loan from non-recourse to recourse if the borrower violates certain provisions.  Examples of these are the two I mentioned above:\n-Fraud: intentional misrepresentation of the borrower e.g. the borrower claims a NW of $10M and liquidity of $1M when they're actually worth $500k\n-Environmental: intentional waste or misuse of the property e.g. you allow a company to dump hazardous waste on the land \n\nExample of ", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "d3c2cxd", "text": "ding, ding! you hit the nail on the head.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "d39ayhi", "text": "Most banks are going to want joint and several guarantees unless you have a lot of cash, great reputation, and significant equity in the asset which takes a backseat to their lien position. \n\nThe deals you are referring to are syndicated deals. The developer in deals such as those has reputation and significant assets the bank could pursue to be sure that the LTV stays at an appropriate level. The developers syndicate (sell units as you call it) pieces of equity to qualified investors (an SEC term) in order to limit the amount of cash they have the put into the deal, allowing them to do more deals and meet the liquidity requirements for other deals they have already invested in.\n\nThis also allows them to achieve very high returns on their cash through the magic of leverage. \n\n\nEdit: the structure you are looking for is a limited partnership or a LLC, but it sounds like the bank isn't going to lend just on your merits alone. Try other banks. ", "replies": [{"id": "d3ab2tl", "text": "Great help.  My bank is kind of talking out of both sides of their mouth on this.  They have told me that I qualify on my own, but then when asked, they said that they want my investor to sign as a guarantor.  I want to ask them, \"which is it?\"  I'm talking to other banks as of today.\n", "replies": [], "depth": 2}], "depth": 1}, {"id": "d39ctcu", "text": "What percentage of ownership will you be giving up?  Banks will have thresholds (e.g. 20%) where LLC members will have to personally guarantee.   Keep the ownership within the right percentages and you're OK.  \n\n\nIf your investors are unhappy with the arrangement, see if they will structure the investment as a loan and take lower % ownership. Or structure the deal using options or pre-sale contracts. ", "replies": [{"id": "d3aa52o", "text": "Thanks.  We've been talking 30%.  How could I structure the deal with options?  As for pre-sale, the building has no condos, so that probably does not apply.", "replies": [{"id": "d3aahpg", "text": "Anything can be a condo.  As for options, that would depend on the specifics of your deal, but basically allows you to get cash without triggering bank's ownership % requirement. ", "replies": [], "depth": 3}], "depth": 2}, {"id": "d3gwwfs", "text": "Jaimeser is right.  The cutoff is 20% interest per silent partner.  above that they have to be a guarantor for most banks.  If the banks want more cash on hand to be protected, then you might have to raise more money, so that some can sit in cash and not as a downpayment.    If your one investor would normally be at 30%, you can lower him to 20% and give him a promissory note for his capital contribution at a decent rate of return.  This way he make x% return from debt and x% return from equity.", "replies": [], "depth": 2}], "depth": 1}, {"id": "d3c2as7", "text": "this is more of a bank policy issue (as opposed to an entity's organizational structure). i regularly avoid adding passive investors and instead look to the managing principals for recourse provisions. \n\nalso, depending on the project's economics you may want to look for limited/non recourse financing options. banks are notorious for requiring full recourse. life insurance cos and even credit unions offer more flexible financing options with regard to recourse. ", "replies": [], "depth": 1}]