Protecting youself as the "Silent" Partner - Posted by Steve S (OH)

Posted by Steve S (OH) on April 02, 1999 at 21:46:08:

Thanks for your input!!! I will pass it along. This
board is truely a great place!

Steve S (OH)

Protecting youself as the “Silent” Partner - Posted by Steve S (OH)

Posted by Steve S (OH) on April 02, 1999 at 09:50:08:


A friend of mine is going to put up 110K to purchase 1/3 interest in a Hotel. He will be a “silent partner” The hotel is selling for 1.3 mil (just background info, not wanting to discuss whether or not he should do it). They will be raising the other funds, either through a bank or other means… He’s trying to cover all of his bases on limiting his liability. What steps should he take to make sure he isn’t personnally liable if the hotel were to go under or the partners skip out on the deal (or what should he do to limit his exposure as much as possible). Any info or opinions are appreciated!!! :slight_smile:

BTW: I’ve got Mr. Bronchick’s Assest protection series on order, but it won’t get here in time to review before he commences the deal (this coming Monday)


Steve S (OH)

Re: Protecting youself as the “Silent” Partner - Posted by JHyre in Ohio

Posted by JHyre in Ohio on April 03, 1999 at 07:02:46:

Unless your friend is getting a phenominal deal, he’s nuts for doing this without drafting a SERIOUS agreement, regardless of entity type used. Partnerships, regardless of the form they take, have a MILLION ways of going south. Even if he’s getting a steal, he’s probably still nuts. What if someone wants out? How much do they get? What if “plans change”? Etc, etc, etc. It’s very easy for silent minority partner (or shareholder or whatever) to get squeezed out, hung out to dry, hosed, nailed, pegged, etc. GET A GOOD AGREEMENT WITH GOOD LEGAL ADVICE. THIS KIND OF AGREEMENT TAKES TIME. Buy Nolo partnership book to get some idea of implications of partnership of any kind, along with some good drafting tips.

John Hyre

More Info: Protecting youself as the “Silent” Partner - Posted by Steve S (OH)

Posted by Steve S (OH) on April 02, 1999 at 15:53:26:


Thanks for the responses so far! My friend is most concerned
with the following: How does he sign for a mortgage with
his partners and limit his liability so that if the
partners default, the lending institution cannot come
after his personnal assets?

Thanks again!
Steve S (OH)

Re: Protecting youself as the “Silent” Partner - Posted by JPiper

Posted by JPiper on April 02, 1999 at 11:33:53:

If I were your friend I would hate to be investing $110K in a hotel, and not having discussed this type of issue with an attorney. But here’s a few thoughts from a non-lawyer.

The term “silent partner” would seem to imply that your friend is not in an active role. So one method of reducing is liability is for the group to take title as a limited partnership, with your friend the limited partner. This eliminates your friend’s liability. The problem though is that you friend is then at the mercy of the general partner?.a situation that I would not be content with personally if it were my $110K. There has been more money lost in limited partnerships, some of it due to this control issue than you’ll ever be able to count.

Your friend MIGHT be able to take his personal share through an LLC, which would go on title as a tenant-in-common with the other partner. Of course if there is a bank loan, the bank may not want this without a personal guarantee from your friend.

My preferred way personally would be to secure myself with a participating mortgage/deed of trust. This would give me a secured interest in the property, without the liabilities of ownership. I would also participate in the upside, to include ongoing income in some fashion. I would hold my mortgage through an LLC. The benefit to me of this structure would be that any default of my “active partner” in the terms of MY mortgage would enable me to foreclose. In other words, I’m secured as a creditor. To set this up your friend is going to require the services of an attorney.

Naturally the particular details are going to vary depending on the exact nature of the transaction.


LP Maybe? - Posted by David Alexander

Posted by David Alexander on April 02, 1999 at 10:16:28:

I Believe a Limited Partnership is the direction you should be looking, with your partner as a limited partner and perhaps a Corp as a general partner. I’ll let everyone else take it from here, as I have no real experience in this.

Daavid Alexander

Re: More Info: Protecting youself as the “Silent” Partner - Posted by JPiper

Posted by JPiper on April 02, 1999 at 17:00:34:

He could form an LLC and then sign the loan on behalf of the LLC. The problem however is that there is almost a 100% chance that the lender will not go for this, and that your friend will be required to sign personally. Whether this will expose your friends other personal assets in the case of a default is going to depend on your state laws concerning foreclosure. Some states, but not all states, enable a lender to get a deficiency judgment if there is a default, and if the property is then later sold for less than the existing loan balance. Check your state laws for information regarding this.

The other possibility is that your friend could attempt to take some quick asset protection moves?.although it doesn’t sound like you’ve got time for this?..and whether this would be effective would undoubtedly depend on the expense and lengths that your friend went to.

Here’s the bottom line. It’s clear that this situation presents a $110,000 risk plus any risk that might arise from a loan default if the project fails. Personally, I would not take this risk unless I was an “active” partner and had some measure of control in the situation. I would also want to see significant upside potential to my investment to compensate for my risk.

By virtue of the fact that your friend is asking these questions at this late date, through you, would lead me to believe that this may not be a situation he has checked out well enough.