Being Forced To Have Your Equity Bought Out?

Question

Hey Everyone,

I had a partnership with two others during the acquisition of a couple properties, both of which are still currently being renovated. Leading up to the purchases, we had a verbal agreement of a 45%/45%/10% ownership, mine being the 10%. Upfront, the mistake was obviously not getting this agreement in writing. For our initial purchase, we used a hard money lender so we signed most of the same docs, the only difference I believe was that they provided personal guarantees on the loan.

With the partnership ending, and they wanting to buy out my 10% ownership, do I have a choice in the matter? We made the purchase in an LLC and we are all equal managers of the entity. I know very little about the legal aspect of real estate so any advice would be appreciated. Also, please let me know if any additional information of the situation would be helpful.

Thanks in advance.

Patrick Wheeler · Answer

@Jeff B. @Pearce G. Thank you for the replies. Looks like I will be chalking it up to a lesson learned.

Pearce G. · Answer

@Patrick Wheeler I agree with @Jay Hinrichs.

If you went in expecting and agreeing to 10%...and that's what you're getting...where's the problem?

Rather than involving lawyers (and I'm not one) there may be a semi-diplomatic option.  If each of you own a third of the LLC, any two represent a majority.  If you can recruit just one of the others to see it your way, you may be able to negotiate something above 10%.

You only mentioned that it was for "a couple properties", so I don't know if this is a dispute over thousands, hundreds of thousands, or millions of dollars.  Assuming the dollars are relatively modest, take your lumps.  Hopefully, your 10% share exceeds your 40% cash contribution, but if it doesn't, you just bought some education.  We've all done it.

Jeff B. · Answer

hmm;  Minority members are frequently bought out without any say in the manner.

Your 40% of the cash is a minority share AND your 10% ownership is a minority position too.

Take your money and choose better partners next time.

Patrick Wheeler · Answer

@Jay Hinrichs I contributed about 40% of the cash and a great deal of sweat equity.

@Chris Masons Thank you for seeing my primary point. They do plan on continuing the partnership once I am out.

One of my roommate's father is a real estate attorney so I was able to have a quick conversation just providing some background information. Again..I don't see the situation escalating, but I would rather at least know my options if need be.

Chris Masons · Answer

I think some people are missing the point here. He is being forced to sell his 10% ownership without having a voice or a say it sounds like....

Are they planning to continue to Partnership without you meaning continue to operate the properties without you? Or are the properties being sold off and everyone is cashing out??

If you feel like you are being taken advantage of I would absolutely contest and or consult an attorney as a last result but wouldn't just accept it if something seems unfair Etc...

Good luck,

Chris

Jay Hinrichs · Answer

Patrick  lets talk about reality... as long as your getting what you deserve based on your agreements. then there is no beef.. If they don't want you in the LLC or partnership.. then you can have hurt feelings but its time to just move on.

If they wanted they could simply stop using that LLC and create another one for a few hundred bucks and just move on.

Its happened to ALL of us throughout our careers partnership come and go dissolve evolve move on etc etc..

The amount of money wasted on Legal fee's fighting these things is just over the top many times with as we all know only the attorneys winning..

And this is the exact reason myself I do not take on small % partners.. not worth the hurt feelings and your feelings of entitlement..

so lets look at this realistically

what did you do to deserve your 10%  did you contribute 10% of the cash?  or is your % just based on sweat equity?

Patrick Wheeler · Answer

@Jay Hinrichs So in this situation our "operating agreement" can be an agreement over text? If this is the case, it is what it is. What I'm not okay with is being forced out of the deal without any say. I was always going to be satisfied with my 10% since it was my first deal, but there is now the question of whether I will maintain any ownership at all.

Jay Hinrichs · Answer

the reasons we use LLC's is there can be uneven distribution.. % ownership has no bearing on dispensation of P and L..

the P and L question should be spelled out in your operating agreement.. like you posted above

you ge 10% of profit or loss and the other partners get 45% .. if that's the agreement then makes no matter who owns what % of the LLC>  even if its not in writing and you guys agreed to it verbally then your not entitle to 33% since your third owner of LLC.. just take your 10% be happy your making some money.. save your money far to unimportant to go running to an attorney.. unless your partners are trying to totally stiff you can pay you nothing.

Charlie MacPherson · Answer

You need an attorney PRONTO.  I have one on my staff if you want a referral.

Being Forced To Have Your Equity Bought Out?

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