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Structuring Profit-Sharing Agreements For Difficult-to-Finance Real Estate Deals

By April 3, 2024No Comments

In the midst of difficult real estate deals, where both buyer and seller are financially burdened, a profit-sharing agreement can be a powerful tool. Profit-sharing agreements can help a party make down payments, cover closing costs, and provide security for the investment.

Profit-sharing agreements can help you save money on closing costs and an eventual sale price paid by you paying the lessor as part of your ongoing involvement.

For example, if a property were being renovated at full cost, the buyer could contribute all materials except for flooring and paint. The lessor would contribute these items at cost because of his or her expertise in this area.

Because of this security plan, you might be willing to pay more than if there was no sharing of resources.

Prepare a capitalization table

When an investor comes into the business with a lot of money, the financing model is altered. Instead of the investor funding most of the projects, a capitalization table comes into play.

This table can be used for many things, but in this case it shows how much each project cost so far and what total cost will be by completed projects. The investor can add up to more than one project because each one is expensive!

This model helps determine if there are enough funds in the business to take on each project, and it also gives investors a place to put their confidence.

Establish the investor payout structure

Structuring Profit-Sharing Agreements for Difficult-to-Finance Real Estate Deals

Once a buyer and a seller have agreed on the purchase or sale of an impaired parcel of land, the next step is to determine how much the investor will pay for each unit in the property.

In return for allowing the investor to purchase a certain number of units in the property, the seller must agree on how much each unit will be worth.

Typically, each unit can be valued at anywhere from $200,000 to $500,000, so there is not too much risk involved. However, if two people wanted to buy a unit together, one would have to pay more than if they wanted to be alone.

As mentioned before, three sources of income can be had with this type of business model.

Identify potential future financing sources

Structuring Profit-Sharing Agreements for Difficult-to-Finance Real Estate Deals

Real estate deals that are difficult to finance can be challenging to plan, manage, and run a successful business on. This is true for both start-up companies and larger enterprises that need significant amounts of space.

To help identify these potential future financing sources, identify potential future financing sources. This includes identifying existing investors or investors who may invest in your company, contacting lenders to see what kind of rate they offer, and/or identifying potential third parties who may lend you money.

When searching for potential lenders, make sure you include all aspects of the business that will help prove your ability to repay a loan such as market value,exit fee protection,and/or risk protection.

Consider making your company’s assets publicly available so any potential lenders can fully evaluate them.

Plan for the possibility of future refinancing

Structuring Profit-Sharing Agreements for Difficult-to-Finance Real Estate Deals

Even if your property is currently not credit-worthy, future refinancing may benefit your property. If and when new loans are made based on your property’s worth, your asset will be counted as trustworthy.

If and when new loans are issued on the property that have higher values than current loans, you can expect a higher share of your asset’s equity in the new loan to cover the increase in value of your property.

In this case, your share of the equity in the new loan may be lower than what you have now, but it still makes sense to plan for possible future growth since you will no longer receive full refinance fees.

Consider tax implications

Structuring Profit-Sharing Agreements for Difficult-to-Finance Real Estate Deals

Real estate deals that require substantial financing or re-real estate activity can be tough monetize. This is true even for highly seasoned professionals.

For example, a property owner is planning to sell a newly constructed luxury condominium next year and needs the money to renovate and re-sell the property. Or the property owner wants to refinance their existing loan but cannot do so until after the new construction project is complete.

Either way, it is important to consider tax implications when structuring your profit-sharing agreement. If you are going to re-invest some or all of your rewards in the project, you should probably do it after federal and state tax returns have been filed and approved.

Another factor that can make or break your deal is whether it falls under the jurisdiction of authorities such as local police or city officials.

Prepare a contract outlining the terms of the agreement

Structuring Profit-Sharing Agreements for Difficult-to-Finance Real Estate Deals

A profit-sharing agreement can be a valuable way to structure a relationship with your landlord. While most profit-sharing agreements include the word collaborative, this is not a required part of the agreement.

Most agreements include term of possession of the property as part of the deal. This means that if you have to move out before your agreed upon time period is over, your landlord will have to give you back half of what you paid for the property.

In order for your agreement to be effective, it must include some kind of reward system. Your goal should be to create a system in which both you and your landlord gain from the property, and where there is no loss involved.

As mentioned above, term of possession can be included in the agreement as part of the reward system. In this case, both parties must agree before phase one of the deal takes place.


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