Sale or Transferability of Partnership Interests, HELP!

[Daniel G.]

Hi Guys,

My question is about ownership and the transferability of ownership interests with limited partners (investors) in a multifamily property deal. How do you guys address the sale or transfer of partnership interests in your operating agreements? How can interests be sold? and if so at what value?

The truth is that my investors have an investment time horizon that is much shorter than mine due to their age and are therefore seeking a maturity or a means to exit the investment vehicle. 

How do you guys address the sale, or transfer of LP interests, assuming that you pay off their principal investment through a refinance in years 4-6.

[Jon Holdman]

You should not make any promises to your investors about getting out.  In fact, you should state very explicitly that getting out before the partnership is wound down will be effectively impossible and that there will be no market for units in your investment.  

Investors with specific timelines may be better structured into the deal as loans rather than equity investments.

That said, you can probably put some language in that investors who want to sell units must offer them to the current investors with a right of first refusal.  That is, if someone wants out, and has found a buyer, they would have to offer the unit(s) to the existing partners at the same price.  You can also include language about how a value will be determined.  For a multi-family, that's pretty straightforward - do an appraisal.  Or several.  With the appraisal, the partnership's balance sheet, and the capital contribution of each investor, figuring out the value of their units is just math.

But, even with a way to determine value, you have to have a buyer.

The securities attorney you're working with to prepare the operating agreement, private placement memorandum, and the securities filing for your deal should be able to help with this wording.  If you don't have such an attorney you need to find one.  Selling securities is not a DIY project.