Joint Real Estate Partnership with Best Friend // Need Help with Legal Advice, Deal Contingenies, etc
Coming here to get additional thoughts and advice and not basing my decision solely on this thread.
Opportunity: One of my very close and trusted friends has the
opportunity through his family to build brand new houses at cost in
new developments throughout the suburbs surrounding a major city. The
entire close family is involved in the real estate and development
process and has their own companies handling each part of the
business. The father has even tossed around the notion of playing the
bank as a favor while we build up the business. If we do go this route
then we would take out a bank loan.
My role in the deal is I would be putting up the initial capital to
get the business started which would be roughly 40-60k for the initial
lot. We briefly discussed profit splits and roles. My original
thinking would be 50/50 since he would be on the ground finding the
lots and keeping an eye on the project BUT I am open to other splits
if that is standard procedure for this type of deal. His brother is a
project manager for his father's company and we would be able to
involve him to oversee the project for a nominal amount of money. I
spoke with my accountant yesterday and he mentioned some of the
following concerns:
1) "The key thing is communicating and come into agreement you
friend's role and the ownership between the two of you. Definitely
don't want relationships to be strained because of this. Always put
down in writing so it can be used as reference further down the road.
2) "Also put in contingency if friend's father is not playing bank.
Would things stall or are you able to step in? Would you be willing to
provide loan and be paid interest? Or would it be considered capital
and you get a bigger ownership?"
3) "One other thing to consider being stated is the completion time,
ie from start of construction to end. I understand projects will be
getting resources at cost so this might not be a point of contention.
I'm just thinking of worst case scenario whereby construction started
but has stalled due to labor being pulled to work on father's other
business, while interest is still being paid on the line of credit."
4) "Make sure you consider insurance needs. Even though friend's
father's business will have insurance covering the construction, you
will need to consider insurance needs pertaining to lot and finished
product."
So... Now armed with this information I am trying to figure out the
best way to structure the partnership and what type of legal structure
will work best. We both have agreed we want it to be a long term type
business to keep building on our investments. Lastly, additional
background on friend is he just completed his post graduate degree and
passed the required state examinations approximately 6 months ago and is
saddled with debt; however, he is beginning to make money and this
will be something we both have on the side to grow our net worth with
minimal tax liability consequences.
Any and all insight from BP users would be GREATLY appreciated.