Opinions on operating agreement for family commercial properties

[Alex Gaines]

Hello,

Long-time forum reader but first-time poster here. I'm interested in getting the BP community's view on a somewhat complicated situation my family is in with some commercial real estate holdings they have owned for quite a long time. I'm trying to help them make some pretty big decisions, and it would be refreshing to hear opinions from outside strangers to the situation.

I'll try to keep this to the bare minimum with the facts, but I need to go into some detail to give the full picture. Grab some coffee; it's a long post.

Background: My father, uncle, and aunt each share equal ownership in a general partnership that owns three large commercial properties (5 parcels in total). Years ago, the family was involved in a logistics business, and these properties were once supporting the operations of that business. After the company closed, they turned these properties into revenue-generating assets by leasing the properties to other logistics tenants. Currently, all three properties are leased triple net to creditworthy, nationally recognized tenants with 5 or 10-year leases. These properties are medium-sized warehouses with drop yards for heavy equipment parking, all located in strategic shipping lanes near major highways. They have no debt, own everything free and clear, and have a 25-year history of successful management of these properties.

The dilemma: Many family businesses struggle to keep family and business separated, and ours was undoubtedly one of them. Let's just say the three owners don't always see eye to eye. All members are now well into retirement age, and two with serious health issues. The big question is not only what to do with the properties, but what is the best way to proceed forward for all members involved. The reason this is a bit more complicated is that their operating agreement spells out some unique restrictions. They are as follows:

• The ownership rights of the partnership cannot be individually transferred, sold, or given to anyone outside of the initial three owners (My father, uncle, and aunt)
• "Buy-sell event"- If any one of the owners become incapacitated, pass away, become bankrupt, or get divorced, this triggers a buy-sell event automatically. The remaining members must purchase the withdrawing member's ownership at a mutually agreed value. This value will then be discounted at 35% for divorce and 25% for any other trigger event type.

Solutions? In the member's view, there are a few options. None of which everyone agrees upon, not surprisingly. The easy answer is to sell. However, getting the members to agree upon a price or accepting an offer would be difficult. Although not impossible.

Passing the properties on to the next generation would be even more of a nightmare as now this would involve conceivably nine people. No one seriously wants this option for many reasons.

Finally, with current health issues, there is a strong chance over the next decade that one of the buy-sell events will take place. From my understanding, each remaining member will then be forced (unless they give up their purchase option) to purchase the membership of the exiting member. In order to purchase the membership of the exiting member, the remaining would need to obtain a large amount of debt (1/3 of the value of the partnership discounted at either 25 or 35%). The problem I foresee is one of cash flow. When the last member is standing, he/she would now hold all the properties but with substantial debt. With this debt obligation, the properties would most definitely not cashflow themselves, and it's likely the last member would be forced to sell.

These are not bad scenarios for the members by any means. It's just that as of today they have a chance to renegotiate their operating agreement and/or decide to sell properties before they are forced to make decisions they may not otherwise want to make. My idea for posting this is to get other outside opinions and maybe look at this from another angle. Any feedback or ideas are welcome. Thank you