Legal Question - 3 way partnership terms

[Robert Cabral]

Hey Bigger Pockets Team,

I am going into a partnership with 2 other colleagues and buying a property. We are creating an LLC, and for now the mortgage will have to be under only 1 of the partners, because he is the only one that can qualify for 10% down. We are thinking about certain terms of the agreement, division of labour, out clauses etc. There are likely some things we're not considering. Has anyone been in a similar partnership? and would you have a blueprint of different terms that need to be considered? I know the obvious answer is "get a lawyer", and we will, but I was hoping to do a bit of research beforehand.

Thanks in advance!

Rob
 

[David Gotsill]

@Robert Cabral - What you're proposing is very common.  And the cautionary tales that @Michael Plaks shares are common as well.

Using his comments as a springboard, you'll generally want your LLC operating agreement to cover the foreseeable bad-case scenarios, including those mentioned by Michael.

There are are few key terms in any partnership that, in my opinion, must be agreed upon in advance for it to function properly.  These are:

- Contributions - what is each person adding to the deal (@Tom S. flagged this immediately).  If only one person is on the loan, are the other experienced in real estate?  Are they boots on the ground?  Have they separately funded or agreed to separate indemnification of the person on the loan?

- Management/Control - who gets to decide what actions to take?  When do you need unanimous consent?  For example, what percentage of vote is necessary to decide to sell?  To perform material rehab?  To even lower rent?

- Distributions - when are LLC members entitled to receive any distributions? Like Michael said, you don't want to be held hostage over 15k.

- Transfers - can a member get out of the deal?  Can they sell to anyone they want?  Do other members get a right of first refusal?  Approval over any potential new member?

This list could go on, but these 4 are usually my keys.

This isn't mean to dissuade you. I've partnered with a couple of guys I met right here on BP - and it's been a win-win-win.  We're not naive, and we know that we could encounter difficult times in the future.  However, we all thought long and hard about becoming partners, and in the end determined it was in each of our own best interests.  At the end of the day, real estate is still a relationships industry, and you can't ignore the power of quality relationships.