Advice on Structuring a Real Estate Partnership Deal

[Andy Chen]

Hi all, I’d like your advice on how to structure a potential deal.

A friend of mine owns a property outright that still has plenty of space for additional development. Since I have construction experience, he’s interested in partnering with me to build more units.

The property originally cost him $600k, and the projected added value is about $2.4M. I estimate total construction costs will be around $1.3M–$1.4M.

His initial idea is for me to cover the construction costs, and then we split the profit once the project is sold.

How would you recommend structuring this deal?

TIA

[Dylan Griffin]

I work in tax (CPA). Make sure you have a competent CPA handle the partnership/LLC filings. One partner is contributing a property with a built-in gain while the other partner is contributing cash or services. The partner with the built in gain will have an asymmetrical allocation of tax income/losses due to code section 704c. Essentially, you can't split the (taxable) profit 50/50 as that does not match the economics of the transaction. It gets complex fast, but in essence, say Partner A contributed $600k cost property with a FMV of $1.5m and say Partner B contributed $1.5m in cash. The current FMV is then $3m. Say property gets developed and sold for $3.4m. You both cash out at $1.7m each but for tax reasons, Partner A gets $1.1m in taxable gain while partner B gets $.2m. There's more to complexity involved, but keeping it simple for now. An attorney is best to make sure the structure is what you both want. A CPA is best for understanding the tax allocation.