Real Estate Partnerships

[Wayne Igo]

I have an opportunity to work in a partnership arrangement with some other investors.  We have been discussing the various ways we can combine our resources and strengths that will be fair and equitable and increase the likelihood of success.  Single and multi-tenant properties will be considered.   I would like to start a good discussion here as partnering in real estate is a common practice.  Please comment on any experiences you have had with partnership arrangements.  Some obvious questions are:

1) Would an LLC be the way to go?

2) With unequal time, capital and skills,  how can the profits be shared?

3) Division of labor?  Sweat equity?

4) What happens when one partner wants to sell a property and other one wants to hold?

5) How should property ownership be handled?  Multiple investors on the deed

There must be some smart way for multiple investors with varying resources and skill sets to come together in a equitable and profitable manner.   Any thoughts, personal experiences, advice or references would be appreciated.

Thanks,

Wayne

[James Miller]

Originally posted by @Wayne Igo:

I have an opportunity to work in a partnership equity arrangement with some other investors.  We have been discussing the various ways we can combine our resources and strengths that will be fair and equitable and increase the likelihood of success.  Single and multi-tenant properties will be considered.   I would like to start a good discussion here as partnering forming an entity in real estate is a common practice.  Please comment on any experiences you have had with partnership equity arrangements.  Some obvious questions are:

1) Would an LLC be the way to go?

Typically, yes. An LLC or LLCs are the way to go in TX. Sometimes a Limited Partnership makes more sense depending on how you are trying to raise funds / manage the entity.

2) With unequal time, capital and skills,  how can the profits be shared?

However you agree with your co-owners (the LLC's members). 

(I hesitate to say partners; the word 'partner' indicates a very specific legal relationship and that is NOT what most co-owners want. A general partnership is a big no-no in TX; there is no liability protection AT ALL in a general partnership AND you are personally liable for all actions of all of your partners including your own actions. So try not to use the word 'partner' unless actually referring to a partner.)

For example and assuming 3 members (A,B,C) including you form HOLDINGS LLC. All three put in $5k for total of $15k. C is the money man and he loans another $100k to HOLDINGS. C then gets a security interest on the LLC's assets so he can foreclose A & B if the deal goes bad. The LLC pays down the Loan over time so C gets interest and return of principal, and A & B get benefit of controlling more property than they could without C's loan. 

Another way is to pay interest on capital accounts. For example, A puts in $10k, B puts in $5k, and C puts in $50k and the entity pays 10% interest annually non-compounded. So A gets $1k in interest at years end, B gets $500, C gets $5k. 10% is probably a bit high, but you get the picture.

Another way is to structure it like a fund, where the main money men get all the profits and distributions until all their initial capital is returned, and then the money men give a big percentage to the 'sweat equity' manager guy. 

Another way is to say sweat equity gets 5% to money men's 95% in years 1,2,3 etc. and afterways sweat equity then gets 25% to money men's 75% the next few years... etc... Flexibility is one of the LLC's largest strengths!

You can even create different classes of membership in LLCs where maybe the ones who put more in up front can have extra profits.

3) Division of labor?  Sweat equity?

However you want to do it assuming there is not regulatory law out there that prevents a certain kind of labor (think needing a RE Broker's license, or being a RIA)

4) What happens when one partner wants to sell a property and other one wants to hold?

That's up to the OA and discusses how many votes are needed etc..

5) How should property ownership be handled?  Multiple investors on the deed

Usually it would be owned in the name of the LLC or other entity that purchases. Many times it may make sense to have two LLCs for asset protection reasons: 1 as a Holdings LLC that owns the assets, and another Operations LLC that takes possession of but not title to the assets and operates them. 

There must be some smart way for multiple investors with varying resources and skill sets to come together in a equitable and profitable manner.   Any thoughts, personal experiences, advice or references would be appreciated.

Of course there are smart ways! :)  That's the point of partnerships, corporations, LLCs, limited partnerships, some trusts... etc..

Thanks,

Originally posted by @Wayne Igo:

I have an opportunity to work in a partnership equity arrangement with some other investors. We have been discussing the various ways we can combine our resources and strengths that will be fair and equitable and increase the likelihood of success. Single and multi-tenant properties will be considered. I would like to start a good discussion here as partnering forming an entity in real estate is a common practice. Please comment on any experiences you have had with partnership equity arrangements. Some obvious questions are:

1) Would an LLC be the way to go?

Typically, yes. An LLC or LLCs are the way to go in TX. Sometimes a Limited Partnership makes more sense depending on how you are trying to raise funds / manage the entity.

2) With unequal time, capital and skills, how can the profits be shared?

However you agree with your co-owners (the LLC's members).

(I hesitate to say partners; the word 'partner' indicates a very specific legal relationship and that is NOT what most co-owners want. A general partnership is a big no-no in TX; there is no liability protection AT ALL in a general partnership AND you are personally liable for all actions of all of your partners including your own actions. So try not to use the word 'partner' unless actually referring to a partner.)

For example and assuming 3 members (A,B,C) including you form HOLDINGS LLC. All three put in $5k for total of $15k. C is the money man and he loans another $100k to HOLDINGS. C then gets a security interest on the LLC's assets so he can foreclose A & B if the deal goes bad. The LLC pays down the Loan over time so C gets interest and return of principal, and A & B get benefit of controlling more property than they could without C's loan.

Another way is to pay interest on capital accounts. For example, A puts in $10k, B puts in $5k, and C puts in $50k and the entity pays 10% interest annually non-compounded. So A gets $1k in interest at years end, B gets $500, C gets $5k. 10% is probably a bit high, but you get the picture.

Another way is to structure it like a fund, where the main money men get all the profits and distributions until all their initial capital is returned, and then the money men give a big percentage to the 'sweat equity' manager guy.

Another way is to say sweat equity gets 5% to money men's 95% in years 1,2,3 etc. and afterways sweat equity then gets 25% to money men's 75% the next few years... etc... Flexibility is one of the LLC's largest strengths!

You can even create different classes of membership in LLCs where maybe the ones who put more in up front can have extra profits.

3) Division of labor? Sweat equity?

However you want to do it assuming there is not regulatory law out there that prevents a certain kind of labor (think needing a RE Broker's license, or being a RIA)

4) What happens when one partner wants to sell a property and other one wants to hold?

That's up to the OA and discusses how many votes are needed etc..

5) How should property ownership be handled? Multiple investors on the deed

Usually it would be owned in the name of the LLC or other entity that purchases. Many times it may make sense to have two LLCs for asset protection reasons: 1 as a Holdings LLC that owns the assets, and another Operations LLC that takes possession of but not title to the assets and operates them.

There must be some smart way for multiple investors with varying resources and skill sets to come together in a equitable and profitable manner. Any thoughts, personal experiences, advice or references would be appreciated.

Of course there are smart ways! :) That's the point of partnerships, corporations, LLCs, limited partnerships, some trusts... etc..

Thanks,