Partners Make the Deal Work

This article is published by permission from a chapter in the book “Advanced Creative Real Estate Financing” by Chuck Sutherland

Originally Published 2016

PARTNERS MAKE THE DEAL WORK

Strategy

Partners provide resources that you may not have or, at least, may not have at the moment. When you are stuck in making a transaction, ask yourself this question. “Whom can I partner with on this?” Partners can, indeed, “make the deal work!”

When I speak of “partners,” I am not solely speaking about “legal forms,” but rather the principle of partnership.

We all have partners all day long without being aware of it. The bank that makes a property loan to us is really a partner in our property ownership. The property owners in your neighborhood are partners in keeping the values strong. The people in your life are partners in having everything work in your relationship. That doesn’t mean that we are always perfect partners or that we always fulfill our obligations of our partnership agreements, or that other partners do as well. Rather, it indicates how interconnected and how interdependent we are in our day-to-day endeavors.

I once told a bank president in Arlington, Texas, that I really appreciated our relationship. “I feel like the bank and I are real partners,” I told him. “Well, that’s because we ARE partners! We own 75 percent of your deal and we get paid back first.” He was right! We really were partners.

The form of a partnership can vary widely, including loans, simple agreements, full-blown LLCs or even Limited Partnerships. However, the form of the partnership is always customized to fit the relationship. The eventual structure of the transaction and the ownership entity are created to fulfill the needs and circumstances of all parties to the transaction.

Commercial or Investment Example

Bill is a Commercial Real Estate Developer in Fort Worth, Texas. Several years ago, he located a long and narrow parcel of land along a highway leading to a suburban area. He saw that with some planning, engineering, and hard work, he could subdivide the land into commercial parcels and offer them for sale. While the development and sale period might stretch over a number of years, he calculated that the financial return would be well worth the time, effort, and investment.

Bill approached an Investor from another state who agreed to invest a substantial portion of the cash for the purchase price. In addition to the money, the out-of-state Investor added a unique perspective to the joint ownership, or partnership. He literally viewed the market differently due to the distance he had from the property. He was also highly skilled in understanding and making complex real estate transactions. His insights and abilities were a valuable addition to the deal.

Over several years, the two of them developed and sold off enough parcels to more than pay for the money, time, and effort they put in.

Summary of Transaction

Step 1: Developer and Investor purchase land from the Seller

  • Developer → Locates and analyzes potential land to purchase
  • Developer → Negotiates a purchase contract on the land
  • Developer → Negotiates joint ownership agreement with an investor
  • Developer and Investor → Close on the purchase of the land

Step 2: Developer and Investor resell the land

  • Developer → Rezones and subdivides the land
  • Developer → Markets the property to potential Buyers
  • Developer → Negotiates the resale contracts on individual parcels of land
  • Developer and Investor → Close on the sale of individual parcels of land
  • Investor → Receives the initial investment back first (after costs are paid first)
  • Developer and Investor → Split profits consistent with joint ownership agreement

Benefits

Benefits to Developer:

The Developer was able to invest in more than one property due to the financial contribution of the Investor.

The Developer also received both “wise counsel” and “transaction-making ability” from the Investor.

Benefits to Investor:

The Investor made a substantial profit over time.

The Investor also received the local “boots on the ground” benefit of having the local Developer managing the project.

The Investor also made a return on his knowledge and ability being added to the transaction.

Key Points

Parties can bring unique perspectives and background. This can be an intangible, but very real, contribution to any transaction. Partners also provide resources that you may not have at the time of the deal. Or you may simply have other usages for your cash. You may even want to diversify your risk into a number of different investments or different kinds of investments. When you are stuck in making a transaction, ask yourself this question: “Whom can I partner with on this?”

About Chuck Sutherland

Chuck Sutherland has been a real estate investor and developer for 50 years and is a member of the Society of Exchange Counselors and also is a member of the National Council of Exchangors. He is also the author of three real estate books: Creative Seller Financing, Creative Down Payments, and Advanced Creative Real Estate Financing now on Amazon via ChuckSutherlandOnAmazon.com.

 

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