Although all of the initial investment capital may have been contributed by the money partner, work partners are usually expected to shoulder a share of the capital contribution too. They do this by not taking distributions to which they would otherwise be entitled until their share of the entity’s capital equals their share of the entity. So, when the project has been completed, the permanent mortgage has been funded, and the tenants have begun to pay rent, you might think that the work partners are ready to enjoy the fruits of his labor. But no. At this point, a simple calculation is made. The money partner tallies all the cash he or she advanced to make the deal possible. To this number he or she might add something for overhead and possibly even something more for unreimbursed venture expenses. From the grand total, he or she subtracts the amounts recouped from the permanent mortgage loan. The difference between the total investment and the total borrowed via the institutional mortgage is the money partner’s net cash investment. If the money partner is to end up with only 50 percent of the equity created by the partnership, you may expect him or her to insist that what would otherwise be the work partner’s share of a cash distribution be paid to the money partner for a while. This amount is credited to the work partner’s capital account. The process continues until the capital accounts of money partners and work partners are in the same proportion as their interests in the venture. |