I’m working with my future brother in law to close an off-market deal for a commercial property (office building) and am struggling on the best way to divide equity. For context, we’re trying to transition from residential to commercial properties and we’ve found what appears to be a solid property. However, due to over leveraging, he doesn’t have the capital to go in 50/50 with me on this property. In a recent conversation, he casually mentioned he thought I’d essentially front the entire acquisition cost (down payment, inspection, etc.) and then he’d pay me back until we established a 50/50 equity split. He’s not a licensed agent, but is acting as the agent (e.g. brought me the property, primary POC with the seller on terms, lease, potential financing, etc.). For obvious reasons, don’t want to sour this relationship, but this seems like unnecessary risk on my end with none on his. After some research, these are the main options I can think of:
1). Pay him a fee comparable to what I’d pay a CRE agent for sourcing/working the deal and maintain 100% equity. I think this would be ideal for me, but don’t think he’d be keen on this as he seems set on trying to get some equity. This may also put him off on partnering on future deals
2). Front the initial investment and have him pay me back. This doesn’t benefit me as I’m taking on unnecessary risk for little upside
3). Front the initial investment, but have clauses within the agreement that make it more equitable (e.g. he is also a guarantor on the loan, he only receives a percentage of profits that match his vested equity, paying premium for equity, etc.). It would follow something similar to a “profits interest” approach
Option#3 seems the best as it minimizes my exposure, includes him in the equity sharing, and allows for the possibility of partnering on future deals. I’m trying to toe the line between making sure I’m fully covered from a risk/reward standpoint without inundating everyone involved with complicated terms. Has anyone else been in a similar situation negotiating equity with a business partner with limited liquidity? If so, what approach did you take and how did it turn out? Thanks in advance!