Jamie Stadtmauer is the Vice President of Business Development at Agora and has over 20 years of experience in commercial real estate investing.
Jamie Stadtmauer is the Vice President of Business Development at Agora and has over 20 years of experience in commercial real estate investing.
Edited by Gilad Idisis
Gilad is a content manager at Agora. He holds a master’s degree (LL.M.) from Columbia Law School and a degree in Practical Electronics Engineering. Before becoming a content manager, Gilad practiced law as a commercial litigator.
Gilad is a content manager at Agora. He holds a master’s degree (LL.M.) from Columbia Law School and a degree in Practical Electronics Engineering. Before becoming a content manager, Gilad practiced law as a commercial litigator.
28 May 2023 7 min reading
The IRS succinctly defines a partnership as “A relationship between two or more people to do trade or business where each person contributes money, property, labor, or skill and shares in the profits and losses of the business.” While this is an excellent start to understanding partnerships, there are many distinctions that must be made, particularly with real estate partnerships. In this article, we’ll look at real estate partnerships in detail: the different structures, their benefits, key considerations in establishing a real estate partnership, their challenges and how to overcome them, and more. Let’s begin with a look at the different real estate partnership structures.
Table of ContentsJust as there are different structures for corporations (Benefit Corp, C Corp, S Corp, Professional Corp, etc.), there are also five primary real estate partnership structures: general partnerships, limited partnerships, limited liability partnerships, limited liability companies, and real estate investment trusts. To choose the right structure, you first need to understand the differences.
While liability is of paramount importance to all parties when deciding on a general or limited partnership, many other factors need to be considered. These are the significant differences between the two:
| Aspect | General Partnership | Limited Partnership |
|---|---|---|
| Liability | Unlimited liability for all partners | Limited liability for limited partners, general partners have unlimited liability |
| Management | All partners participate in management | Limited partners have no management authority, general partners manage the business |
| Decision-making | All partners have equal decision-making power | General partners have more decision-making power than limited partners |
| Contributions | All partners contribute equally as agreed | Limited partners contribute capital but have limited involvement in operations |
| Liability for losses | All partners share losses equally | Limited partners’ liability is limited to their investment |
| Partnership agreement | Not legally required, but advisable | Legally required to have a written partnership agreement |
| Duration | May dissolve upon the withdrawal of a partner | Can have a fixed duration or continue indefinitely |
| Taxation | Partners report income and losses on their personal tax returns | Similar to a general partnership, but limited partners may have certain tax benefits |
| Adding partners | All partners must agree to add new partners | General partners can add new limited partners without unanimous consent |
It’s important to note that partnership laws and regulations may vary depending on where the corporation is domiciled or business is conducted. It’s always recommended to consult with a legal professional or refer to the laws applicable in your state.
| Aspect | Limited Liability Partnership (LLP) | Limited Liability Company (LLC) |
|---|---|---|
| Liability | Limited liability for all partners and owners | Limited liability for all members and owners |
| Legal entity | Partnerships with some characteristics of a corporation | Hybrid entity with features of both a partnership and a corporation |
| Management | Partners typically have management authority | Can be managed by members or appointed members |
| Decision-making | Partners have decision-making power based on partnership agreement | Decision-making power is determined by operating agreement |
| Ownership | Partners have ownership interest in the partnership | Members have ownership interest in the company |
| Formalities | Fewer formalities and less paperwork required | More formalities and paperwork involved |
| Taxation | Partners report income and losses on their personal tax returns | Can choose to be taxed as a partnership, corporation, or disregarded entity |
| Transfer of ownership | Ownership interests are generally not transferable | Ownership interests can be freely transferred or assigned |
| Formation | Typically formed by filing a partnership agreement with the appropriate state | Typically formed by filing articles of organization with the state |
Research the regulations and requirements or consult a professional concerning the most appropriate business structure for your needs.
A Real Estate Investment Trust (REIT) is a type of company that primarily invests in Income-generating real estate properties. It allows individuals to invest in real estate assets without directly owning or managing them. Investors can buy shares of publicly traded REITS on major stock exchanges; private REITs are also available. REITS generate income through rental income from their properties, capital appreciation of real estate assets, and sometimes through mortgage interest. In addition, they are legally required to distribute a significant portion of their income to shareholders as dividends. REITs usually specialize in a specific type of asset class. For instance, one REIT may focus on apartment communities while another may focus on retail, office, residential, healthcare, or industrial properties. Unlike other real estate companies, REITs are obligated to primarily hold and operate the properties they develop rather than resell them for profit. Source
Without a specific goal or objective in mind, your chances of selecting the best structure for your needs are diminished. Decide what matters most to you – control, defined exit strategy, ease of reporting, tax advantages, etc. Consulting with your financial advisors and your attorney can also provide clarity.
There are four primary benefits of real estate partnerships: Enhanced access to capital and resources: Partnering with others provides you with capital to benefit from opportunities you wouldn’t have been able to pursue on your own because of financial limitations. Risk mitigation and liability protection: The shared risk provided by a real estate partnership is often the best protection against financial loss and liability. Pooling expertise and specializations: When it comes to real estate investing, partnering with others who have different strengths than you is a prudent move that dramatically improves your chances for success. Flexibility in decision-making and governance: Aspects of real estate partnership agreements concerning decision-making and governance can be customized to suit the specific needs and preferences of the partners. Key considerations in establishing a real estate partnership
No one enters into a partnership expecting it to fail. For a real estate partnership to flourish, there are numerous key considerations you must address and steps you must take before executing a formal agreement. They are:
Ask yourself these three questions when you’re considering entering into a partnership: Do I trust my potential partner(s)? Are our goals and expectations aligned? And are our values similar? If you can’t answer in the affirmative to all three, take it as a red flag that must be addressed before pen and paper meet.
Any team, sports or business, won’t succeed if people don’t know and agree to their roles and responsibilities. Partners can appear unmotivated and disinterested when they don’t clearly understand what’s expected of them.
This is an area where many partnerships struggle. Expectations of what a partner will contribute financially, what their percentage of the profits will be, and when they’ll receive those profits are where the wheels can come off. Discussions and commitments concerning these issues must be attended to before operations begin.
Knowing in advance how decisions will be made is a defining characteristic of successful partnerships. Those who wait to delineate decision-making power and protocols clearly can open themselves up to dissension and disagreements when critical decisions need to be made.
An effective partnership agreement provides clarity, addresses potential issues, and establishes a framework for the smooth operation of the partnership. It should be clear, concise, and comprehensive. You should have arrived at it through the collaboration and consensus of all the partners. Naturally, the plan must be legally compliant for the jurisdiction in which it operates. Finally, it should be flexible and adaptable, while also being realistic and fair.
Every partnership, personal or professional, will experience challenges that must be overcome for the partnership to continue in a healthy and functional manner. There are several key considerations concerning real estate partnership challenges.
Effective communication and conflict resolution require ongoing effort and a commitment to collaboration. Real estate partners can foster a positive and productive working relationship by prioritizing communication, actively working through conflicts, and implementing resolution strategies.
Expectations and goals should be agreed upon before individuals commit to a partnership. If a conflict arises, partners should come together to discuss and reassess the partnership’s goals, objectives, and strategies. Managing expectations and goals in a real estate partnership requires continuous communication, active participation, and a shared commitment to the partnership’s success.
One of Steven Covey’s 7 Habits of Highly Effective People was “Begin with the end in mind.” This is certainly true for real estate partnerships. Discussions should be held before the partnership is formed concerning goals and what happens when those goals are, or aren’t, reached, and one or more of the partners would like to exit the partnership. There should be no surprises concerning the dissolution of a partnership. The future of real estate partnerships
The future of real estate partnerships is being shaped today by various factors, including market trends, technological advancements, and evolving investor preferences. While these factors offer insights into potential developments, the future of real estate partnerships will also be influenced by broader economic conditions, regulatory changes, and investor preference. Adapting to changing market dynamics will remain essential for real estate partnerships to thrive in the future.
Real estate partnerships have long been a prominent vehicle for investors to collaborate, pool resources, and pursue promising real estate opportunities. As the real estate landscape continues to evolve in a post-pandemic world, real estate partnerships will very likely remain a cornerstone of the real estate industry as they seize opportunities and shape the future of real estate investment. Modified Date & Time : 30 May 2024, 12:37 pm
