What Contract/form To Use In A Limited Partnership?
Hello,
I am working with a partner investor (so far not formalized, but that's why I'm here). He is buying a property in Denver; his name is on the loan and will be on the deed. I am going to be a limited "silent partner" just putting up initial investment money in the beginning, with no say in the decisions of the property and no management responsibilities. We plan on structuring it as me holding a note to get interest on my initial investment, and then getting a slice of the profits at final sale. We're going to buy and hold for at least 2 yrs.
We are trying to figure out what forms/contracts we need to use to formalize this relationship. Do we do a limited partnership agreement outlining the obligations of the partners, what we each get out of it, etc. (referencing a simlar thread at http://www.thecreativeinvestor.com/ViewTopic27131-12-15.html) and then would I also need to get a mortgage or promissory note, or somehow otherwise "stake my claim" to a piece of this prop for which I am investing the money?
Can anyone give advice on how to structure this, as well as point to templates of these agreements we could start with? Thanks!
are you set on using a LP? I think they are overly combersome.
I love LLCs. (I used to love c-corps)
Imagine 2 LLCs. one that you own and fund w/ the $$ you're investing (LLC1)
and another LLC2 that your partner and you share.
The shared interest in LLC2 (per operating agreement) covers your backend profit sharing. It may not address the operating expenses as you didn't talk about that.
LLC1 lends the money to LLC2 to buy the property.
standard note and RE agreements per (CO?) law or the laws of the state LLC1 is formed.
You mentioned a bank loan. Will you be the 2nd? are you comfortable with that?
I hope I captured the essence of your deal.
This sounds like a big enough deal to consult a lawyer and atty.
Thanks for the reply. Actually, I neglected to mention that this is quite a small deal - the bank loan is for ~250K and I would be contributing ~10-12.5K. I appreciate the great advice for using LLC, but not sure if we would want to set up LLCs for this small scale deal. Am I off base here? Otherwise, you suggested using standard note and RE agreements. By note you mean promissory note? And RE agreements - did you have a particular form in mind? Thanks for your advice.
You already answered your own question.
Create a note. Record the note when the purchase takes place. The note terms can be interest plus a percentage of the profits according to a formula.
Other then watching out if the state has a limit to what can be charged as 'interest' you will be fine.
The other person has full control other then selling without paying you off first or failing to pay based on the balloon details.
The other risk you might run if you do this more then once of so if you might need to be licensed to be making loans to homeowners. Owner occupied properties are worse then an investment deal. If you only do a few it is less likely anyone will care unless you find a deal goes bad. Then the other side might use the rules to claim that you illegally made the loan.
John
[addsig]
Off base? I don't know
LLCs are much easier to set up the LPs. and can be used as a generic shell for other deals
yes, I did mean promissory note. Some states uses note, mortgages, various terms
Are you comfortable being behind the banks loan.
If he default, you could get wiped out. Perhaps a personal guarantee, or if he's paying enough interest, the risk is work it.
Any shareholder, partnership, co-tenancy, guarantee would most likely be a cost form.
Yeah, I think a LP is way to complicated for this transaction. I don't think I'd even bother with an LLC unless there is some other reason to do it.
So your partner does all the work, You get a preferred rate of return on your money and above that there is some split. Did I get that right?
Record your second mortgage. Put the property in land trust at a local bank (assuming they have such an animal in CO). Make the beneficiary of the trust a regular partnership or you and your partner as Tenants in Common. Be sure to set forth in the partnership agreement that your partnership interest is in addition to the mortgage interest.
Make sure you have enough liability insurance to protect yourself in the event somebody hurts themselves on the property.
Thanks all for the feedback, great advice as usual. Anyone have a template for a promissory note being created between two parties? Thanks!
Good point commercial. Why have an entity is it's just a loan? certainly simpler.
active says:
Other then watching out if the state has a limit to what can be charged as 'interest' you will be fine.
I've never considered the equity upside being part of the promisory note.
If it is, does the upside have to be factored into the "APR" and increase the risk of usary?
Quote:If it is, does the upside have to be factored into the "APR" and increase the risk of usary?
Equity sharing provisions of notes are not considered in the APR calculation for CA usury (nor is it in any other state, as far as I know).
so the added profit isn't considered "interest?". Interesting. That sure could make for more creative finacing by HML or private money sources.
Quote:
On 2004-06-08 20:13, 4e6zbi102 wrote:
Quote:If it is, does the upside have to be factored into the "APR" and increase the risk of usary?
Equity sharing provisions of notes are not considered in the APR calculation for CA usury (nor is it in any other state, as far as I know).
Being more than a little conversant with usury, I think you're looking at it from the wrong viewpoint...from the borrower's position, if HE's paying more than the legal rate, whereever he is, it could be usury...doesn't matter how his not might be split up by the payees.
As usual, thanks to all for the insightful and helpful replies. We talked to an RE lawyer and as was suggested here... we are 99% sure we're ending up to do it with me as simply a loan on the property. All the terms re: my interest payments, balloon payment term/note term, share of appreciation at sale, etc. will be covered in the loan agreement. (We need to double ck w/ her but I think we'll also have things like "voting rights," liabilities etc. covered in this agreement.)
We close on June 23, so we are finalizing everything this week. Just another thanks to everyone's valuable input!