Can KPs take depreciation on a deal?
If we KP on this deal, can we KP on other deals at the same time? or did we use up our financial backing on one deal?
You can do as many as you like. This to me made no sense to me initially. At this point in time I believe I am guaranteeing 8-10 different loans.
How much money do we have to put into the deal? (like as an LP, minimum is $50K)
Every deal is different. In a case, where we would be helping you more than helping ourselves especially for someone under $2M (just another guy) net worth its not worth much. We would like you to put money as a LP but not needed… but at the same time if you are signing your name on the debt I think you should believe and feel comfortable investing on the LP side. For investors bringing in larger sums (300-400k) we have tried to award them with additional GP shares because it lowers the number of investors and cuts down on admin costs.
How does this work? How much does this bump up the return? ($250,001-$400,000 (w/ additional GP shares))
For larger investors we award some extra shares from our GP side. This essentially acts just like you were to get additional LP shares. To think of it like “what is my roi” then is difficult to determine… instead you need to think about it like just getting a few LP shares for free and do your own math on your own to determine “what is my roi”.
We do this for a couple reasons: 1) larger investors means less investors and therefore less admin costs/burden, 2) we really value and appreciate those investors/relationships who have invested with us in the past and are good partners. In lieu of a fruit basket or Christmas ham (which I personally did did not like which I got from my first company I worked for as I worked Thanksgiving/Holidays on-call)… we wanted to open our wallet and put or money where our mouth is.
I understand that I would be held responsible if there’s “bad actors” on the GP side, but what if the deal just goes bad and ends up losing money, is GP, and or KP responsible for losses?
In non-recourse deals where there is no foul play we should be able to exit the deal with everyone’s original capital lost but not have to pay the balance due. The nice thing about real estate is that it retains its value. In the worse case scenario however, ultimately it becomes a negotiation with the bank to take back the asset (which they don’t really want to operate) and paying back part of the recourse portion (if any). I am speculating a bit but in that case those in the GP and KPs would have some sort of internal mediation/arbitration/litigation where the tab for the balance due need to be paid back one way or another (think Oceans 12
Note: I am not a lawyer and I have not had the experience of seeing the doomsday scenario play-out. If you have any questions it is best that we discuss in conversation as this is a very “it depends” arrangement with a lot of nuances to. As with many good things, there is not much written on the subject and it is not black and white.
What’s the return for loan amount guaranteed?
i.e. if we guaranteed a loan backed with 4 million of our net worth, what can we expect to get out of it?
We usually set aside 1%-10% of the GP for loan guarantors (more for full recourse loans less for non-recourse loans). With a net worth of 4M on a 16M loan you would be entitled to 1/4th of that allocation. It depends on deal size of course but that could be worth 30-60k just for signing on the loan with us.
What documentations are required to prove the value of net worth?
There is not much really. You complete a spreadsheet and submit to bank. They might come back with some questions but its a pretty painless process. A fraction of the pain you had with getting a bank loan for your primary residence. I always thought it was a little wild how the process was mostly self certify too and how much less red tape there is.
What’s the upper limit of the liability to LG personally? Is it just the loan amount guaranteed or could be more?
This is where I can’t really give you a good answer as no one can really anticipate what would happen should the deal fail. Having a non-recourse loan really helps things but being a loan guarantor essentially means that you are backing the note personally. I would imagine should anything go wrong the liability will be settled amicably within the loan guarantor (key principal) group but this may be settled via mediation or litigation. I would not recommend anyone start out being a KP right off the bat and they should get to know who they are working with by being a LP first. In the end, it is comforting to know that the Bank does not really want to take on the burden of running an asset which is why they are in the business of banking… most of these circumstances would end in a settlement which we would use an experienced attorney to arbitrate.
What if I am not a US citizen?
For Fannie/Freddie deals (lender is more restrictive) – non green card holder or citizen they will downgrade your net worth by 50%.
For Bridge (lender is LESS restrictive) – non green card holder or citizen you get 100% of your net worth.
Liquidity – they will not allow your liquidity to count unless in US and USD. This is not really a big issue as we normally have enough liquidity to qualify.
Experience – they will not count your experience to count. This is not really a big issue as we normally have enough experience on our own to qualify.