Setting up a Partnership Agreement - Fair clause for buy-out?

[Simon Li]

Background

My Real Estate Partner and I are looking to set up a partnership agreement for our first ever Real Estate investments. Biggest advice we've received is to have a fair Dissolution of Partnership / Partner Buy-out clauses included in the agreement. That way, if we are separating in the future and do not reach an amicable agreement, we can refer to our agreement. An agreement made beforehand is always more unbiased than trying to come up with a fair buy-out in the future right?

Calculation

The main calculation itself is pretty straight forward:

Buy-out Cost = 0.5*(FMV-Mortgage)

This would take into consideration any built-up equity over time.

FMV would be determined from 1 or 2 appraisals OR how much similar units are selling for (if it's a condo being sold).

Costs Associated with Selling

For a portion of the cost associated with selling the property (Legal/Bank Fees/Realtor Fees), I've tried to search around and gathered the following FOR/AGAINST arguments for including such fees:

FOR including the fees:

• There should be a 'penalty' for pulling out of a long-term partnership.
• If the surviving partner sells at some point, he takes the whole portion of the cost himself.

AGAINST including the fees:

• The surviving partner has the option to conduct a For Sale By Owner, or use services such as ComFree, in which case no major realtor percentage fee would be paid.
• The surviving partner may choose to never sell.
• The surviving partner would still have a cash-flowing asset that is likely to appreciate.

Based off these arguments, I think what might be fair is the normal Buy-out Cost calculation, minus a nominal percentage. Somewhere in between 1/2 of the closing costs and not including it at all.

For unfortunate situations like Death or Divorce, we've agreed that there would be no 'penalty' on leaving early.

Would appreciate some feedback in this manner. Thank you for the advice.