Structuring a Real Estate Company

[John Johnson]

I have two partners who I trust to start our own real estate company. The question that comes up is the structuring of the company. From a normal standpoint as single investor/operator I would create LLC's for each asset of real estate I plan to develop and hold/sell. When usually investors are needed they we will jv and I will be the GP contributing 0-10% and the LP contributing at 90-100% of the investments. Profits will be split up with hurdles or a straight split after a pref. The structure of this is simple as cashflows will K1 to each of individuals or entities. My questions now comes to creating a partnership where 3 of us are all GP's utilizing investor's (LP) money to acquire, develop, and cash flow multifamily type developments.

Is it better for us to form a C-Corp, Real Estate LP, or a normal LLC for the operating company. The company will basically be running soup to nuts for development utilizing 90-100% of investors capital. We are hoping the operating company to be our parent company where the 3 of us have a set % of ownership. Ultimately we would like that our company to have some % of ownership in each project that we will develop. Each project will open a LLC for JV or investment of course and possibly another single member LLC under the JV LLC per each asset (if more than one asset will be developed in the JV). I should also mention that none of us will be contributing capital to the parent company as our investors will be providing us upfront development fees which would be the source of revenue (other than the cash flow splits after completion of projects).

Just looking for some input on the formation. This is California btw.

[David M.]

@John Johnson

Interesting...  Thought I'd chime in...  What is a "real estate company?"  Sounds like you are looking to do your own developments.  But, I'm not sure of your question.  Looks like you already have a structure.  If I understand correctly:

I'd would think that you form a LLC between the three of you --- call it "3Friends" for now. I wouldn't do C Corp if you plan on holding, and while I realize partnerships are very powerful (but not exactly sure why), gain the asset and liability protection of the LLC while still operating as a partnership.

Then, 3Friends will be the managing partner for each development project/venture/company that you do.  But, if you aren't putting capital into the projects, is 3Friends really just being hired by each project?  It doesn't sound like you are going to have any "skin" in the game, so basically you are a General Contractor?