Everything You Need To Know About Setting Up A Real Estate Partnership Agreement

Real estate has always ranked near the top of lucrative investments available in liberalized economies, with many of the wealthiest people in history making their fortune in buying, selling, and developing land. It’s also one of the most capital-intensive forms of investment, as the supply is inherently limited by the space available in urban settings and the fecundity of the land itself for resource development.

Due to these high upfront capital requirements and the risks involved in development, the number of individuals or small companies who can independently afford to buy valuable property is limited. Many investors interested in working in real estate choose instead to share the costs, risks, and profits by creating partnerships with other investors through the use of partnership agreements.

A real estate partner agreement is a legally binding document that holds immense importance in the world of real estate ventures. These documents define the business structure that exists between the parties that make up the partnership, including each party’s role, their responsibilities, obligations, how they share profits and losses, managing conflict, and how the agreement can be terminated.

As with any business partnership, a well-crafted partnership agreement that clearly lays out the expectations of each partner can make the difference between the business becoming a major success and becoming a major liability for everyone involved. By understanding the most important elements of a partnership agreement, you’ll be able to understand what you should insist be included in yours.

Listing The Parties Involved and Their Roles

The common conception of a partnership involves two people working towards a common goal. In reality, business partnerships can have a number of partners who are each liable for different aspects of the business. The first order of business in the partnership agreement is listing each individual or entity entering into the partnership.

This typically involves specifying the names and roles of each party. For example, if Tom, Jorge, and Real Estate Corporation D wanted to enter into a partnership together, the agreement would explicitly list each party and their role in the agreement. 

Mapping out who is responsible for what is usually based on negotiations over the qualifications, experience, expertise, and resources each party brings to the partnership. Defining the roles and responsibilities of each party right from the start will help all parties involved avoid common pitfalls and conflicts associated with partnerships later on.

Defining the Purpose of the Partnership

One of the primary purposes of a real estate partner agreement is to articulate the objectives and purpose of the partnership clearly. This is especially important for real estate partnerships, as these business entities are often created to buy, manage, or develop a single property rather than an ongoing service or production line. The agreement should specify the real estate project or transactions that the partnership intends to pursue. 

A well-defined purpose serves as the foundation upon which all further decisions and actions are built. It provides a clear roadmap for the venture’s direction for both stakeholders and potential investors and helps set achievable goals.

Contributions and Ownership

In the end, the goal of every business (and the individuals who make up that business) is to make money. Money is also the primary cause of disagreements and conflict within a business, which means creating a plan to distribute the business’s income is a critical element of the real estate partnership plan.

Each partner brings something different to the relationship in the form of contributions. Contributions can take any number of forms, including capital, property, skills, expertise, and even time and effort. Contributions are used to calculate ownership in a fair partnership agreement: the more a party contributes, the greater the level of ownership.

The process of defining ownership and contributions can involve intense and complicated negotiations. We recommend that you enlist a law firm specializing in business and real estate law to guide negotiations, ensure all parties are satisfied and that the documentation is crystal clear. This significantly decreases the chances of damaging disputes over financials later on.

Management and Decision-Making

A well-crafted real estate partnership agreement should clarify how the partnership will be managed and the processes involved in decision-making. Part of defining the roles of each partner involves creating a chain of management for different aspects of the business, while major decision-making will often involve deciding voting rights for each partner and whether decisions require a simple majority or unanimous consent.

The idiom “too many cooks in the kitchen” doesn’t just apply to gastronomy – creating an effective management chain and a decision-making process ensures smooth operations while doing business. It also proves helpful in avoiding conflict and providing avenues for resolution when it does arise.

Allocation of Profits and Losses

Typically, profit distribution is based on ownership percentages, but this aspect can be customized to suit the partnership’s specific needs. Similarly to contribution and ownership, clear guidelines should be established for how and when profits will be distributed.

Doing business always involves some level of risk, and one of the most common of these risks is the accrual of losses. Just as each partner negotiates their percentage of the profits, they also need to determine their share of the losses. The partnership agreement should include details on how losses will be distributed and whether any limits or safeguards are in place to protect individual partners from excessive financial liabilities.

Dissolution and Exit Strategy

All good things come to an end, and business partnerships are no different. A key aspect of the real estate partnership agreement is establishing guidelines and processes in case the partnership ends, whether due to the successful completion of the project, a partner’s desire to exit, or other circumstances. 

The agreement should outline the process for dissolving the partnership and dealing with a partner’s exit. This includes how assets and liabilities will be distributed and any buy-sell provisions in case a partner wishes to sell their interest.

Unsuccessful exits from a partnership can lead to lengthy and damaging legal disputes, which means creating a well-crafted exit strategy can prove extremely beneficial down the line. Having a law firm that specializes in drafting legal documents for businesses can help ensure that all parties are satisfied with the resolution of the departure without the need for further litigation.

Dispute Resolution

No matter how carefully a partnership is planned or how well the partners initially get along, disputes are an inevitable part of both business and life. Real estate partnership agreements help limit disputes and mitigate the risk of a costly dissolution and legal battle.

Every agreement should include provisions for resolving disputes. These provisions commonly include legal mechanisms like mediation, arbitration, or other alternative dispute resolution methods. Defining the process and criteria for invoking dispute resolution procedures in the agreement will facilitate the process for any aggrieved party.

These provisions provide a less acrimonious and costly avenue of conflict resolution and can help maintain the integrity of the partnership. Too many of us jump straight to litigation at the first sign of conflict; providing alternatives lowers the threshold and improves problem-solving.

Compliance with Real Estate Laws

While not particularly exciting, ensuring that the partnership and its stated objectives stay within the confines of the law ensures that all business processes remain compliant with governing regulations. Real estate ventures are subject to hundreds of local, state, and federal laws and regulations, including zoning, land use, and property-specific rules.

Ensuring compliance with these laws is essential for the success and sustainability of the partnership and helps avoid paying out fees and being subject to litigation or even criminal investigation. The partner agreement should explicitly state the commitment of all parties to adhere to all relevant real estate laws and regulations in the relevant geographical area.

Legal Review and Execution

If you did not use a law firm to draft the real estate partnership agreement, it is crucial to have it reviewed by experienced real estate attorneys to ensure its validity and effectiveness. Legal experts can verify that the agreement complies with applicable laws, protects the interests of all parties involved, and is in line with the industry’s best practices.

Once reviewed and finalized, all parties will need to sign it. To ensure that the document is legally binding, enforceable and provides legal protection to all stakeholders, the signatures may need to be notarized.

A well-crafted real estate partner agreement is a powerful tool for increasing the chances of success and longevity of a real estate venture by ensuring fairness and creating concrete plans for an uncertain future. Partnering with the expert real estate and business law attorneys at Villasenor Law Offices can significantly enhance the quality and enforceability of the agreement. 

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