(upbeat rock music) – Hello everybody and
welcome to another episode of Coffee with Carl. Today I wanted to talk a little bit about debt versus equity. We talked a little bit
about, on the last episode, about funding your entity
and things like this. I want to talk a little
bit from the terms of, what if you’re in a joint venture deal with another party and
what that looks like from the equity versus debt funding side. So we get a lot of questions on, basically they come in as, hey, I’m doing a project, a joint venture, we’re running low on funds,
I need to put money in, how do I do that, do I have to
change the profit percentage or do I just put money in,
or do I just do it as a loan, which is the best way? So, I wanted to talk a
little bit about that today, because we do get quite a bit,
quite a few questions on that just simply because projects
do change, needs change, and we want to be sure
we know what we’re doing if we have to add additional funds. So, first of all, let’s talk about equity. So if I’m investing equity,
it means I am just basically putting more cash into
the account of the LLC that is going to be one of
say, let’s call it a flip for this example. So if I’m doing a flip
and I just put money into the business or to
the joint venture LLC, then I’ve invested equity and
technically my capital account should reflect that additional money, and even the percentages can change on the amount of ownership. So this can cause a
couple different issues in that capital account,
so there’s a priority that gets paid out when
you’re doing a project, okay? So if there’s a profit on the project, which we all hope there is
and a lot of times there is, then this is not such a big deal because everybody’s getting
all their initial funds back and then they’re splitting
the profit, right? So maybe that profit’s a little bit more, maybe it’s a little bit less, but ultimately everybody’s at least getting their investment back plus some. When we’ve run into issues is, when say a project is going to take a loss or a project isn’t going to
be able to, more specifically, may be able to pay off
the hard money lender but may not be actually fully pay back those capital accounts. This is where kind of the
squabbles and issues can happen in a partnership because
everybody then wants to say, well I’m entitled to this pot of cash, or I’m entitled to more
of it than you are, or you know, you’re only
the equity partner in that, you’re the developer, you
haven’t actually put cash into the project. So there’s a lot of
different pieces we can do within the LLC. So I’m just gonna go down
the route of how we generally draft them, because
through our experience, this is the best solution or
the best way we’ve found it. And how to, if you need, put more money into this project but do it at a lower risk and that way you can hopefully at least
get all of your money out and hopefully the project is gonna create a profit, in which case, it all kinda becomes somewhat irrelevant. So when I fund equity, it just
adds to my capital account. Meaning once the hard money lender’s paid, any other debt is paid, then we start looking at clearing the capital accounts and then we divide profits after that. So that’s the generally sequence. So the difference is,
I’ve got to put money in, into a project in order to say, extend my carrying cost time,
maybe we had a budget overrun, maybe there was something we discovered that we didn’t factor into
the construction budget, then, what’s the best way
or the most likely way I’m gonna get my money
out of this project, especially if we’re running
long on time, low on funds, and it’s starting to look like
this project may take a loss. So, debt gets paid out before equity. So what I would say, or what I would suggest
to most of my clients who are going to do this, or bring in those additional funds is, I usually would suggest doing
it as a loan to the business and not just a cash
contribution which is equity in the business, because those loans
actually get paid out first, before the capital accounts or the equity accounts basically. So, that’s why I would suggest doing debt if you’re trying to put a
little additional cash in, in order to carry a project
a little bit longer. Cause debt gets paid out before equity. So, that’s a good place to use debt. I like it, you may have to you know, if everybody’s putting in money, it may make sense to do
equity, but a lot of times what happens in these projects is, one is the funding partner,
one is the developer so the money person tends to always be just the money person. There are variations of that
so if you come across something and you need some help,
for our platinum clients you can always give us a
call, we’re happy to advise ya on your project, what you’re
doing, just letting you know, you know, so you can
bounce it off somebody. Those of you considering
to be clients out there, always happy to speak with
you on a free consultation. As you can tell, we put
out a lot of free content on our channel. I would encourage you guys to go tax wise, I would also say, you know what, come to one of our live
classes, three days, I’ve never heard anybody said, well that was a waste of time. (laughing) So, we look forward to
seeing you at those. It’s been a pleasure talking with you. I think my time is up. This is Carl signing
off from Chicago today. So I’ll talk to you folks later and see you on the next episode. (upbeat instrumental music)