How to best structure LLC partnership for a fixed 10% return to investors?
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[{"id": "gvz5dwx", "text": "Of course. And a lawyer would be happy to structure that for you ;)", "replies": [{"id": "gvzuga0", "text": "OP isn\u2019t serious. Nobody who is serious discusses this with strangers on the internet. People who are actually serious solicit legal advice from an actual professional.", "replies": [{"id": "gw0b6zi", "text": "You might be surprised at how many entrepreneurs are successful with no connections as introverts.", "replies": [{"id": "gw0f63q", "text": "And these introverts with no connections attract significant capital from a team of investors to buy a hotel?", "replies": [{"id": "gw0glx7", "text": "Fair point but in my experience even your accountant can connect a business with investors.", "replies": [], "depth": 5}, {"id": "gw0j1yv", "text": "Yes? A CEO of a $5B REIT I have met is extremely introverted and not a charmer at all.\n\nPeople can succeed without being extreme extroverts.", "replies": [{"id": "gw0uyjo", "text": "Lol, would a CEO of a REIT ever ask this subreddit for advice? The context of the while discussion was that OP\u2019s question to ask the question here reveals that he isn\u2019t actually a major player who could pull this deal off.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "gw1ddnh", "text": "Introverts who are able to seek capital from outside investors? Again, people who are serious actually seek advice from actual professionals.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gvz5mg6", "text": "&gt; Now the problem is that when we get the end of the year K1s, the partnership cash flows are split based on invested amount. Can the equity be structured in a way where its a fixed yield?\n\nYes, talk to your CPA about \"special allocations\" and \"guaranteed payments\". The K-1 should reflect the economics of the deal/partnership not the other way around. The other option is to give them debt secured by the property instead of equity in the partnership.", "replies": [{"id": "gvz99so", "text": "Correct me if I'm wrong here... But if it's a 'guaranteed payment', then it's taxed as interest vs if it wasn't guaranteed, then it's treated more like equity. That would matter if I was investing.\n\nJust structure something where cash flow is distributed 50/50 or even 100/0 until the LP gets a 10% return on invested capital, then 0/100 thereafter. You'd have other waterfalls for other capital events (sale, refinance).", "replies": [{"id": "gvzabcn", "text": "&gt; But if it's a 'guaranteed payment', then it's taxed as interest vs if it wasn't guaranteed, then it's treated more like equity. That would matter if I was investing.\n\nYes, that matches my understanding (I am not a tax nor accounting professional). But if they're guaranteed 10% regardless of the investment's performance, isn't it essentially the same thing as interest anyways? There may also be implications for at-risk rules if the return on investment is \"guaranteed\".\n\n&gt; Just structure something where cash flow is distributed 50/50 or even 100/0 until the LP gets a 10% return on invested capital, then 0/100 thereafter. You'd have other waterfalls for other capital events (sale, refinance).\n\nThis is a fine option, but how depreciation and debt service payments interact with \"cash flow\" should be explicitly mentioned and spelled out.", "replies": [], "depth": 3}, {"id": "gvzeelj", "text": "Ok perfect. Yes this is the answer I was looking for. I'm familiar with waterfalls and promotes but was just looking to structure a flat yield. Thanks.", "replies": [], "depth": 3}], "depth": 2}, {"id": "gw0uydz", "text": "For the second piece of your answer, wouldn't that be dependent on the debt structure?  I assumed that the total equity would impact the down payment and overall loan structure.", "replies": [{"id": "gw1wfrg", "text": "Yes, it is dependent on the debt structure. At the end of the day, there is a fine line between the most junior debt and the most senior preferred equity.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gvz6rre", "text": "&gt;Can the equity be structured in a way where its a fixed yield? \n\nOf course, that is a waterfall structure. It is very common and any real estate lawyer should be able to do a legal document that would provide protection to both of you.", "replies": [], "depth": 1}, {"id": "gvz6uw7", "text": "You can structure it as preferred equity that basically acts as debt, only problem though is that if your senior lender thinks it\u2019s debt they may not allow it as they view it as essentially a second trust deed on the property", "replies": [], "depth": 1}, {"id": "gvzwym1", "text": "Of course. Speak to your attorney to include the appropriate language into your OA.", "replies": [], "depth": 1}]