Partnership Agreement or LLC / Partnership Exit Strategy

[Travis Pirtle]

Hi all,

I purchased a property with a good friend 7 years ago. We each put down 50% of the down payment and split the cost for new paint, appliances, and small repairs needed prior to listing the unit for rent. We agreed up front to a buy and hold strategy with no profits drawn until we decide to either sell or buy a 2nd property.

We self-manage and I have handled all the bookkeeping and day-to-day operations (of which there are few).

We have been fortunate to do very well with this property in terms of cash flow ($550/month), appreciation (63k to about 110k), and tenant turnover (none!)

Unfortunately, we were sloppy in our setup of this partnership. The loan is entirely in my name and we have no partnership agreement or operating agreement of any sort on paper. I'm sure you can all see how this has the potential to go south.

We are seeking advice on the best way to protect both of us. I know an LLC would give us 50-50 ownership, but the due on sale clause worries me. I have been told by an attorney it's extremely unlikely for an account that is in good standing, but I am looking for more opinions there. Could we get by with a simple Partnership Agreement?

We also know that someday we will want to sell. Assuming we don't do a 10-31 exchange, how do I go about (legally) transferring a large sum of money to him without being hit with the Gift Tax? An LLC would solve this problem, but would a Partnership Agreement? I am entirely confused on how to go about this part of it.

This property is in Chicago, IL.

Thanks in advance! 

[Crystal Smith]

Quote from @Travis Pirtle:

Hi all,

I purchased a property with a good friend 7 years ago. We each put down 50% of the down payment and split the cost for new paint, appliances, and small repairs needed prior to listing the unit for rent. We agreed up front to a buy and hold strategy with no profits drawn until we decide to either sell or buy a 2nd property.

We self-manage and I have handled all the bookkeeping and day-to-day operations (of which there are few).

We have been fortunate to do very well with this property in terms of cash flow ($550/month), appreciation (63k to about 110k), and tenant turnover (none!)

Unfortunately, we were sloppy in our setup of this partnership. The loan is entirely in my name and we have no partnership agreement or operating agreement of any sort on paper. I'm sure you can all see how this has the potential to go south.

We are seeking advice on the best way to protect both of us. I know an LLC would give us 50-50 ownership, but the due on sale clause worries me. I have been told by an attorney it's extremely unlikely for an account that is in good standing, but I am looking for more opinions there. Could we get by with a simple Partnership Agreement?

We also know that someday we will want to sell. Assuming we don't do a 10-31 exchange, how do I go about (legally) transferring a large sum of money to him without being hit with the Gift Tax? An LLC would solve this problem, but would a Partnership Agreement? I am entirely confused on how to go about this part of it.

This property is in Chicago, IL.

Thanks in advance! 

Something to consider that we have used in the past. Even if you create an LLC after the fact and state that each party has 50% interest unless there's a filing with Cook County, your partner's interest are not really protected. In situations like this we have filed & recorded a Notice of Interest with Cook County Recorder.  We've done this when loaning $ on deals when an HML would not allow a 2nd position to be recorded when closing on a deal.  The Notice of Interest was recorded weeks after closing & when the properties were eventually sold, the notice was found by the title company & had to be settled at closing.  We would file the notice in the name of our LLC & have never had any problems.