Good fences make good neighbors, as poet Robert Frost observed. And in the world of multifamily real estate, a good partnership contribution agreement makes good partners. A real estate partnership can provide huge benefits for property investors and may operate like a well-oiled machine, but it takes work to keep it that way.
One essential step in preventing partnership collapse is to be as detailed as possible in your partnership contribution agreement. Another is to commit to transparency, because as you devise your partnership strategy and goals, you may be astounded to discover how many assumptions about your business you might not have otherwise shared with your partners. Working these details out early will contribute to a harmonious partnership.
Why You Need a Partnership Contribution Agreement
A multifamily real estate partnership is a business structure that allows two or more entities to own a business jointly and share its profits and losses. A partnership contribution agreement regulates what each partner brings to the partnership and what rights those contributions secure. In return for their contributions, partners may receive a share of the profits and a say in running the business. Quantifying those returns exactly as a percentage of the profits and working out a decision-making process will be unavoidable.
There are a number of things that partners must agree on to do business together. The most basic of these include:
Business name. Since a partnership is a legal entity, it has to be registered under a name. That name might simply be the members’ names, as is common with law firms, or an arbitrarily chosen name.
Partnership contributions. Contributions are often in the form of money, but they don’t have to be. A partner could contribute property, including intellectual property, or labor, which is sometimes referred to as “sweat equity.”
Management. There is a basic division between general and limited partners (informally known as silent partners). Limited partners are not involved in the management of a partnership and have a lower level of liability than general partners. The general partners have equal rights and responsibilities, including personal responsibility. Unless a partnership agreement says otherwise, all general partners can make unlimited decisions on the behalf of the partnership. If specific partners are selected to manage the business, their decisions are treated as contributions to the partnership and are likely to be rewarded in profits.
Profit sharing. Profit sharing can take many forms, but will likely include regularly paid portions of the partnership’s profits. Share size must be agreed on for every partner. Additionally, you’ll probably want to address some other financial issues that are likely to arise: Will the partners be reimbursed for their contributions? If so, when? What if a partner wants to take money out of the business?
Changing partners. A multifamily real estate partnership may be formed for a single deal or a much longer term. Regardless of the time-frame, a mechanism should be put in place for partner departures (planned and unplanned) to avoid having to discuss the topic later, perhaps even in an adversarial setting. You’ll also need to consider how profits and responsibilities will be redistributed among the remaining partners. Keep in mind that changes are sometimes involuntary. While the death or disability of a partner may seem like a distant possibility, it is a good idea to prepare for it from the start. You might choose to create a mechanism for adding partners, too.
In addition to this bare minimum, consider adding at least one more point to your partnership agreement:
Dispute resolution. By crafting a resolution procedure in advance, you could save a lot of time and money, especially if your agreement stipulates that partners are bound to seeking arbitration before taking legal action against one another.
No Two Partnerships Are Alike
The generalities noted above may apply to a small number of individual partners with equal rights or one person and a much larger organization. Multifamily real estate partnership agreements must cover a wide range of circumstances. So, by necessity, they allow for a tremendous amount of variation. Because of the uniqueness of every partnership and the level of detail that may be involved in an agreement, professional legal assistance is usually required to draft an acceptable partnership agreement.
At CWS Capital Partners, we use experienced real estate attorneys who provide our partnership agreements and other pertinent legal documents that are created for our business partnerships. We are a fully-integrated multifamily real estate investment management firm that offers everything from due diligence and risk management to transaction support and property management. We specialize in assisting our clients with 1031 exchanges, acquisitions, repositioning, and development. We also own and manage luxury multifamily investment communities in major markets around the country, and we employ a team of experts who can help you hone your investment strategy.
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The information provided here is for your general informational purposes only. It should not be considered a recommendation or personalized advisory advice. CWS has made this third party information available from authors it believes are knowledgeable and reliable resources. However, its accuracy or completeness cannot be guaranteed and sentiment may change due to legal or economic conditions.
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