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What is Limited Liability Company (LLC)?

Most real estate investments are structured using Limited Liability Companies.

The sponsor provides a small portion of the capital for the investment, but offers the equity investment opportunity to investors and the time and expertise to find the investment opportunity and to manage and lease the investment.  The investors provide most of the equity capital, but also are passive.  Although each transaction is different, typical structures may include the following:

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Limited Members:

  • Provide the majority of the capital (usually 80-95%)

  • Receive a “preferred return” on their investment (often 7-12% annualized)

  • Receive a share of the remaining cash flow and profits (typically 50-80%)

  • Receive the bulk of the tax benefits, such as depreciation and interest deductions

 

Sponsor:

  • Provides a portion of the capital (usually 5-20%)

  • Receives the same preferred return as investors on its own invested capital

  • Receives a profit participation of the remaining cash flow and sale profits

  • Receives fees relating to property acquisition, loan financing and management

 

The sponsor will manage the property.  Investors receive a “preferred return” before any profit sharing with the sponsor.  The preferred return, often in the 7-12% range, means that the investors will receive that amount per year on equity invested before the sponsor participates.  The sponsor will receive a management fee, a financing fee for arranging the loan, an acquisition fee at purchase, a disposition fee at the sale of the property and a profit participation.