For several reasons (diversification, help with financing, etc), I’ve decided that I will open up my real estate investments to friends and family who are potentially interested in having an equity stake in my investments. When the situation arises that I have equity partners in a deal, I will certainly spend some time with my CPA and my attorney to ensure that all my T’s are crossed and I’s are dotted.
In the meantime, I’ve outlined some high-level parameters for how I plan to deal with equity partners, and have added that to my business plan:
LISH PROPERTIES BUSINESS PLAN
Leveraging Outside Investments
In order to provide greater flexibility to meet its investment goals of asset accrual, cash flow, asset exchanges, and diversification, the company will look to outside investors to provide additional capital on top of that of the primary owners. A percentage of each property acquired by the company will be opened up to equity partners, and each investment vehicle will operate under a separate partnership agreement specific to the investment needs and the desires of the partners.
To ensure the alignment of goals between the company owners and outside investors, the company will generally retain a minimum 33% ownership in each investment. The company may, under certain circumstances, choose to hold an investment on behalf of outside investors where the company has not stake; in these cases, the company will ensure that the overhead associated with these investments poses no tax on other investments or investors.
Each individual investment vehicle will have an associated partnership agreement that lays out the rights and responsibilities of the partners for that investment. The company will attempt to maintain consistency in partnership agreements for the sake of simplicity and overhead reduction, but also recognizes that in certain circumstances, specific terms will be required to satisfy investors within a particular investment. Because each property will have a separate partnership agreement, and because some investors may have a material interest in multiple properties, it is important to note that at no time will the company implement a partnership agreement that poses a conflict of interest towards other agreements or investors, without agreement among all affected investors.
Management of Investments
The company will be responsible for the day-to-day management of the investment properties, and will retain the right to make decisions affecting day-to-day management issues. This includes â€“ but is not limited to â€“ the following types of decisions:
- Whether to use a property management company
- Tenant screening and acceptance criteria/determination
- Property maintenance and repair decisions
- Rent increases/decreases
The company has authority to make all day-to-day operating decisions, it will do everything possible to optimize both for long-term appreciation and short-term cash-flow for its investors.
Prior to purchasing any property, a short-term strategy for transitioning the property to new management will be identified. Entry strategies may include rezoning efforts, improvements to the property, adjustments to rental rates, implementation of marketing plans, sub-metering of the utilities, etc.
Prior to purchasing any property, an ideal exit strategy for the investment will be identified. This exit strategy will be agreed upon by the investor partners, and will be documented in the partnership agreement. Typical exit strategies may include (but are certainly not limited to):
- Short-Term Sale (especially for Rehab and Value Plays)
- Refinance to Regain Investment (especially for Value Plays)
- Long-term hold for cash flow
- Mid-term hold for 1031 exchange
During the hold period, investors will have the opportunity to reevaluate the exit strategy for the property; the partnership agreement will clearly identify the rules for determining and executing on the exit strategy for the property.
Conflicts of Interest
While the company may consider adding partner owners at some point who have voting rights towards corporate decisions, it should be clear that investors into specific investment vehicles will have no operating control over the corporate entity as a whole. Instead, investors will have clearly defined rights and responsibilities towards their investment vehicles as defined in the specific partnership agreement that governs the investment. Additionally, the company will ensure through contractual agreement that at no time will it undertake a business strategy that presents a conflict of interest with investment partners without agreement from affected partners.