Terms for potential partner - Posted by Luis Robles

Posted by John B. Corey Jr. on July 01, 2005 at 12:20:11:


One answer is to offer then the minimum that they will accept. They might choose badly as they are not that used to such investments. Hence ill will could developer later if you given them what they want.

If they were to supply the funds as a loan then they have some extra security. Hence they would expect (or should expect) a lower return then if they were putting in cash as equity.

Things to consider.

  1. Appreciation. As this sounds like a commercial property the appreciation is more the result of the management then it is of the general market. Hence passive appreciation (market forces) is a bit different then active appreciation (good management, improving the property, changes that fundamentally shift the NOI).

  2. There are tax benefits that can be carved out to some extent. The tax benefits might have different value to each investors. Write offs now and possible capital gains treatment later. Hence the deal can be structured to bias the tax benefits to some investors and not others.

  3. The investment is illiquid and has higher risk. If the cash stays in a bank account the investor can pull it out any day and they are very well protected compared to investing in a specific piece of RE. Hence there should be some benefit for taking on the added risk and lack of liquidity.

The opposite is also true. If you set up the deal so that they can get out at a specific point in the future or so that they are less at risk then some other investor in the deal then it will make sense that they earn a lower return in comparison.

  1. NOI - You made no mention of what the property should produce in spare cash flow. Remember that the person managing the property should be compensated for their time and effort. Hence more of the NOI can go to the active manager. You can leave the ‘surplus’ NOI in a account for the benefit of the project. A reserve that builds up to deal with major improvements, etc. If there is more cash then is needed and it sits there the excess can be distributed to the investors as an interim payment or at the end of the project’s life.

You can use the NOI to buy out the partners who put up the cash assuming that is something agreed to initially.

Luis - Golden rule for such deals. Assume that you will get real good at finding deals. Figure that this deal is nothing. Hence take real good care of the investors so that later then want to do more with you and they brag to others how well they did. That way you will have people chasing you with cash. Take care of them this time and you will have a gold mine to draw on for future deals.

Simple math - If they are expecting X in total return pay them 110% of X. Exceed their expectations.


Terms for potential partner - Posted by Luis Robles

Posted by Luis Robles on July 01, 2005 at 04:45:40:

I need to get an idea of some typical terms that I might offer an investor who will help me buy a property.

The situation is that I have a good deal on a large building. I will need 350K to close the deal I can put in about 100K the rest I need from an investor. I have a couple of investors in mind who do not invest in real estate but would like to. These investors will be happy to make a better return on their money which is just sitting in the bank now. I will manage the property.

One scenario is that they make a return on their cash and get no equity stake in the property. What kind of return should I offer them? If I pay them only when I refinance, say in 3 years, what kind of return should I pay in this case?

The other scenario is to offer them an equity stake in the building. In this case what kind of a percentage is fair? Is it crazy to offer them just a percentage of the equity growth on top of their principal? Ie. they would not share in the NOI during operation but would get a percent when we sell or refinance.