Fair equity for commercial real estate partnership??
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[{"id": "icmjwtb", "text": "Curious to see the suggestions", "replies": [], "depth": 1}, {"id": "icmkfvp", "text": "I think it really depends on how the 5th partner feels about the expected income monthly/annually on their end.. if youre looking for a lender to finance,, let me know :)", "replies": [], "depth": 1}, {"id": "icmq2oy", "text": "Damn.  This is about 300 different kinds of fucked up.\n\n*\"Assuming the lease and our practice pays the entire mortgage payment each month what would be a fair percentage of ownership for the limited partner. \"*\n\n100%", "replies": [{"id": "icnb2m3", "text": "Serious.  He can generate 10% on his money per year and get his investment back in full in 3-4.  How is that a bad deal?", "replies": [{"id": "icncszg", "text": "Capital can be allocated anywhere in the market. Why would he/she choose to accept limited returns when the market can provide similar returns elsewhere. Your partner may not see this the same way, but you are on subreddit of real estate professionals and that's why you are getting these responses.", "replies": [{"id": "icndei5", "text": "So why would he except limited returns when he can get similar elsewhere?  Why wouldn\u2019t he?  He\u2019s trying to help.  If he\u2019s just going to get similar what\u2019s the difference?  I dont mind the responses, I asked the question.  I don\u2019t have experience in real estate partnerships as you all can tell.  That is the reason for the question.  I guess in real estate 10% isn\u2019t a good return which very well may be the case.", "replies": [{"id": "icnw0tz", "text": "It\u2019s not that 10% is a bad return, it\u2019s that the 10% is a terrible return relative to the risk involved.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "icmqy60", "text": "If I was the money man, I\u2019d put the 20% down and just buy the building.  Why the hell would the tenants (you and the other 3 stooges) get any of the rental income?", "replies": [{"id": "icna4rv", "text": "Well it sounds like they control the deal so I think there is a way for them to make this profitable given 50% of the building would be leased to a 3rd party tenant. Also the guarantees for a strong medical lease are favorable to a lender for permanent financing", "replies": [], "depth": 2}], "depth": 1}, {"id": "icmv2au", "text": "Typically, the one funding the down payment gets half. Otherwise they'll just build it themselves. So your new partner would get 1/2 while the rest of you get 1/8 each. \n\nYou guys are still making money, own half the building, all while putting in a total of $0", "replies": [], "depth": 1}, {"id": "icn9a3v", "text": "I think you are saying the \"partner\" is the only one putting money up, 1 million, for the down payment on the building. Right? Not each person is putting a million. \n\nIf that's the case, he would just get his own loan, buy the building and own 100% and you lease it from him and pay him rent. You dont get ownership just for being a tenant of the building and paying rent. \n\nUnless he wants to split the risk with you or something on the other half that's empty I guess he could give up some ownership. But even then he would have a vast majority of ownership of the building in most scenarios I have seen. You are putting in no money and are just the tenant.", "replies": [{"id": "icn9o26", "text": "I understand that but he\u2019s a friend and willing to help.  We will buy him out in a few years. He should be able to make 10% return each year and get his initial investment back when we buy him out.  Doesn\u2019t seem like a bad deal to me.", "replies": [{"id": "icnar1c", "text": "I mean it's a great deal for you guys. Your basically getting 80% ownership of your buikding for nothing, paying him 100k a year when for the same loan he would get 5 times that if he just bought it himself. \n\nIf hes a friend just doing you a favor and doesnt care, sure he can do what he wants. But hes basically putting up all the money needed to buy the building, taking 1/5th of the money he should get AND hes taking all the risk because it's his money in the loan. If your business goes tits up and the building sells for less hes the only one that loses.\n\nSo ya he can always do that. But if you are actually asking whats fair as a real business transaction would be him buying it, collecting a reasonable rent from you and then you guys buy him out when possible.", "replies": [{"id": "icnb8zo", "text": "So your saying anyone with 1 million cash can generate 500k on it per year.  Show me how to do that and I\u2019ll cash out my 401k and sign up.", "replies": [{"id": "icnqxo6", "text": "That's not what I said at all, i was just using your rough numbers you laid out in the post. \n\nI'm saying he should get all the rent because if he bought the building with his 1mil that's what he would get. \n\nSo he's still spending 1 mil, and only getting 1/5th of whatever he would normally get under a normal situation. How is that a good deal for him?", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "icnujm0", "text": "10% is not near enough return for this level of risk.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "icn9uex", "text": "I think you are talking about an equity share type program but instead of you guys coming into the deal and a developer giving you equity it\u2019s the reverse of that - where you guys are organized and want to bring on somebody to float the deal. What are your anticipated rents on the 50% unoccupied?", "replies": [{"id": "icnaapw", "text": "Before interest rates went up we were going to be about 8-10k positive each month above expected mortgage payment.  Of course it\u2019s all guessing until we have more accurate numbers but that would give us enough to get him a return on his investment until we are able to buy him out.", "replies": [{"id": "icnb7rq", "text": "I think you need to talk to a SBA lender, I don\u2019t know what market you are in but some programs out there for 100% financing for medical users. I think you acquire the asset and then lease out that other 50% space - your mortgage is paid and you don\u2019t even have to get a partner. Viola!", "replies": [{"id": "icnbl4y", "text": "We are looking into that as well.  I was just asking an honest question not trying to fuck anyone.", "replies": [{"id": "icnc1oo", "text": "I get it 100%. Partners are tricky", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "icnvry0", "text": "For him to get your mentioned 10% return/year. That would be $100,000 on his $1,000,000. If the building cash flows positive $8-10k per month, then 100% of the cashflow would need to go to him to get the mentioned return.", "replies": [], "depth": 3}], "depth": 2}, {"id": "icnausc", "text": "Basically my wife is in a group of on/gyn and they have two offices.  Some don\u2019t want to own and some do.  It\u2019s stupid paying lease when you can own imo.  A friend has a building he is willing to sell rt next to the hospital and has part of it leased.  Her group isn\u2019t going anywhere and will sing trip net lease for 10 years which would cover around  60-70% of the mortgage.  Part of the building is already leased and it\u2019s 100 yards from the hospital so shouldn\u2019t be difficult to get tenants.", "replies": [{"id": "icnbsht", "text": "This deal keeps getting better. I think you are on the right track. There are many ways to structure a deal like this.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "icna7z8", "text": "lmao. get outta here. You're asking someone else to pony up the million and take all the risk but give them next to nothing for the trouble?", "replies": [{"id": "icncdor", "text": "How is 10% a small return?  He\u2019s got plenty money and is looking to diversify into other things.  Be a lot better than most will do in the market this year.", "replies": [{"id": "icnjr57", "text": "Your 10% isn't actually 10%, it's just 10% of flows. Not even guaranteed 1.1x equity multiple. Unless it's 10% cash-on cash, this is an act of charity. Which your potential equity investor is free to do with their money, but it's objectively a bad investment.\n\nYour entire project is one big IF and a big risk for any investor.\n\n&gt;we will lease the remaining \\[office space\\]  \n&gt;  \n&gt;exact cost \\[of purchase\\] isn\u2019t known  \n&gt;  \n&gt;\\[we\\] don\u2019t want to pay the down payment on loan  \n&gt;  \n&gt;*assuming* the lease and our practice pays the entire mortgage payment\n\nThese are all huge red flags. 20% of small businesses fail in the first year, 50% within 5 years. If your practice doesn't perform and the other tenant (if you even find one) is in arrears, then your investor is on the hook for the mortgage. And mortgage rates are *way* up in the past year, making it even less likely your practice will drive enough business in month one to cover whatever debt payment you have whenever you close. Hell, from an underwriting / character assessment standpoint, none of you are even willing to put in any your own money; an investor can only trust that you'll walk out on him if things go south.\n\nFrom a CRE/investment view: You're asking for a free lunch and leaving the investor to clean up, do the dishes, and take out the garbage. Meanwhile, iBonds are risk-free and paying 9.62% over the next 12 months, the investor can buy the max $10k for his entire extended family and still have plenty for 50% down on a small multifamily in an urban market.", "replies": [{"id": "icnlch0", "text": "Understand but these will be leased by the hospital and her practice is the only in the city and has been in business for over 40 years.  This is not a huge risk as far as going out of business.", "replies": [{"id": "icnpu8q", "text": "You may find a more receptive audience in a business planning subreddit/forum or such. People in CRE are generally highly attuned to investment risk and return, which in your scenario are too high and much too low, respectively.\n\nWere I the investor, I'd just buy the property, charge you rent, not give you any ownership, give you an option to buy me out at X years. That's what I and most others would do with the money. If your investor-friend just wants to help you out for nominal return, then sure, you're all winners. It is nevertheless a bad *investment* and your investor's financial advisor would tell them the same.", "replies": [{"id": "icnqftc", "text": "I\u2019m not worried about comments.  If you read the bottom I asked what is fair and if it should be more or less.  No worries here I\u2019m a grown up I can handle it.  Just funny I get some serious answers from some and just str8 shit talk from others.  Asking questions these days is a coin toss on getting answers or bashed.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "icnbkwb", "text": "This is some wallstreet bets type shit. You\u2019re asking for a free lunch and some sucker to take all of your risk for an incredibly small relative return. If you don\u2019t even want to put skin in the game for a building that\u2019s housing your own business, why in the world would an investor take anything less than 100% equity in a situation like this. Not to mention you\u2019ll have additional expenses finishing out and leasing the remainder space and I\u2019m gonna go out on a limb and guess you and your doctor pals aren\u2019t gonna want to make cash calls either when the time comes.", "replies": [], "depth": 1}, {"id": "icne6n0", "text": "Tying up a million dollars in an illiquid asset requires risk and is typically rewarded with control and ownership of the asset", "replies": [{"id": "icnelvs", "text": "That\u2019s all relative.  1 million in liquid assets on a 100 million project isn\u2019t going to get you control, but I understand you point.  A million to some isn\u2019t that much.", "replies": [{"id": "icnf3zu", "text": "Direct real estate investment is illiquid", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "icnlkhd", "text": "I think it depends on how the numbers look for what % would be reasonable, but from a risk perspective, they are taking on all the risk, and I would want a premium for doing so. \n\nAlso if they are an LP in this they are \u201ctechnically\u201d buying a syndication investment from the sounds of it, so you need to visit with an SEC attorney if that\u2019s the case. \n\nIf it were my $, I would consider something like an 8 pref and 60/40 split, and possibly adjusting the split at breakpoints of a return of capital from the initial $1M investment I make, and in excess of an IRR breakpoint.", "replies": [], "depth": 1}, {"id": "icnm5p3", "text": "You own the business, get cheaper rent, and you think you should get equity for this? What is stopping this person to invest 20% down to buy it then lease it back to you?\n\nIts a lose-lose situation for 1 of the 5 partners.\n\nAnchor tenants are not owners.", "replies": [{"id": "icnp3ii", "text": "Who said anything about cheaper rent.  Don\u2019t make shit up.", "replies": [], "depth": 2}], "depth": 1}, {"id": "icnoe89", "text": "The money man makes the rules, so this is theoretical but let us know once you pitch this to the guy who\u2019s putting up cash and let us know what he says about the deal. That\u2019s all that matters.", "replies": [], "depth": 1}, {"id": "icnpgha", "text": "There is definitely a % of ownership that an LP would take for this deal, but that all depends on the investor. \n\nIt comes down the cashflow and IRR, and each investor has a different hurdle rate for a deal to make sense. With back of the envelope numbers most LP\u2019s would need at least 30-50% ownership for this to make any sense. To confirm, the other lease and your 4 partners cover the mortgage and the LP gets a % of what\u2019s left over?\n\nI\u2019d recommend explains your structure, specifically who is paying for what, and ask what they would need as ownership (% of profits and % of proceeds from sale).", "replies": [{"id": "icnpw71", "text": "Thanks.  I was just asking what was fair.  I haven\u2019t done a deal like this and getting answers like I\u2019ve already screwed my idiot friend.  I\u2019m sure he wouldn\u2019t do anything he isn\u2019t comfortable with.", "replies": [], "depth": 2}], "depth": 1}, {"id": "icnr055", "text": "Generally ownership = % of the money invested.\n\nTry this, make the $ guy the Limited Partner (LP), you guys (the sponsors) put up 1% of the down payment and keep the general partnership (GP) owning 1% but 100% of the control.  Pay the LP 8% preferred return that is paid first after the mortgage and accrues if it ever can't be paid.  After that LP gets a 12% annual return, after which any excess profits are split 60%/40% in favor of the LP or whatever split you negotiate.\n\nSomebody might take that deal depending the creditworthiness of your group and whomever leases the other half.  That's a pretty standard sponsor/promote real estate deal.", "replies": [{"id": "icnr8k7", "text": "Thank you!", "replies": [], "depth": 2}], "depth": 1}, {"id": "icntgg9", "text": "I would say you simplify things by having the investment partner own the building outright, set your rents based on a yield you both agree is fair, and then just build a purchase option into your lease that allows you the purchase the building at some future date at a defined price. This guarantees his returns, still allows you to own the building when you\u2019re ready, and simplifies the overall structure. EDIT: it also greatly reduces the equity partner\u2019s risk because he has the full value of the building backing the large loan he\u2019d be taking out, so if somehow your practice groups went bankrupt he wouldn\u2019t be SOL.", "replies": [], "depth": 1}, {"id": "icnwp39", "text": "I would create an llc, call 4/5 of the downpayment a loan to the other four owners based on their percentages.  Charge a small interest rate and recoup that investment over the years with interest.", "replies": [], "depth": 1}, {"id": "icnxay2", "text": "Let the investor buy the building and structure a lease to buyout structure so he has security, he gets full tax benefit, and you can agree to a return he\u2019s comfortable with.  Is the other 50% of the building preleased?  That\u2019s a big factor if the other half is spec or not", "replies": [], "depth": 1}, {"id": "icosa2v", "text": "Well if he is putting the entire down payment he should get 100 percent of the property. What you are committing to him with this so called deal is a \u201cHey let me get 80 percent of your property if i bring my practice to your building and lease from you.\u201d Why would anyone give up 80 percent of their property to a tenant? Unless he is going to be sharing in your profits from the actual practice and not just the least he should definitely own 100 percent of the property.", "replies": [], "depth": 1}]