He wants $720k from me on 18 units and is putting in $60k

Before the terms, check whether the pref is even coverable. $1.63m of debt at current quotes, ask him for the actual rate and amortization in writing. On a 30 year schedule you're probably at $115k to $125k of annual debt service. 18 units at, call it, $1,150 a month post renovation is $248k gross, minus vacancy and 40% opex on a 1970s building is roughly $140k NOI. That leaves $15k to $25k of cash flow before his 4% asset management fee, which is another $9k off the top.

So your 8% pref on $720k is $57.6k a year and the building pays you a fraction of it. The rest accrues. That's fine if you meant it to, but it means your entire return sits in the exit or the refi, and he controls the refi. That's the term I'd spend my chip on, not the co-invest.

Also have him show you the renovation budget line by line. $95k across 18 units is $5,280 a unit. If he's underwriting the rent gap you verified on the back of a $5k turn, one of those two numbers is wrong.

sextant is right about the refi but I'd go at the fees first, and not because they're too high. 2% acquisition on $2.35m is $47k, and if his co-invest is $60k he's funding his equity out of your closing statement. That isn't alignment, it's a transfer with extra steps.

I've done two of these. Both times the version that worked was fees down and co-invest up, so he has $150k of his own that he can't get back except through the same waterfall you're in. Once that's true, a lot of the control language stops mattering as much, because his incentive on a refi lines up with yours.

One thing you left out: what's your basis for the 8% opex assumption, and does the draft say who pays for the mistake if the renovation runs to $160k? Pro rata capital calls with a partner who has no liquidity is a dilution clause with no dilution formula. Ask him what he wants to happen in that case and listen to the answer he gives before his lawyer edits it.

Slower question, since I'm still learning this. When canton says the pref accrues rather than pays current, does that mean the 8% keeps compounding on unpaid amounts, or just adding up flat? I've seen both words used like they're the same thing and I don't think they are.

sable, they're not the same and the operating agreement has to say which. Simple accrual adds 8% of your contributed capital each year to a balance. Compounding accrues on the unpaid balance too, so the number gets bigger faster. On $720k over five years the gap between those is real money, and I've read drafts where the defined term said one thing and the distribution section said another.

canton, here's another angle worth checking: your consent right on refinance is worth less than you think if the lender's documents already restrict it. Most agency and bridge lenders have change of control and secondary financing language, and they'll want to know who the 92% money is. Get the lender's actual loan terms and any consent requirements in writing before you negotiate the operating agreement, because the two documents have to agree. If your OA gives you a veto the loan documents don't permit, you find out at the worst moment.

I'd also ask what happens on his death or disability. Nine LP checks means you've never had to care. With one operator and 92% of the money, you should.