Contract for 3-person deal - lawyer referrals/recommendations

8 Replies

My husband and I are planning a deal with 2 of our friends who are experienced real estate investors. We have a 4 unit out of state deal lined up in Pittsburgh, PA and need to create a legal contract prior to executing the deal. We are seeking legal counsel on how to best structure a partnership for investing agreement. We reside in Northern California as do our friends, and not sure if we need the lawyer to be local to us or from the state we are investing in. Any input is greatly appreciated. Thanks in advance!

I find that when my out of state clients/investors need legal, financing or accounting assistance it works best to have locals work for you.  While real estate feels similar nationwide, every state and even many localities have nuances that remote professionals may not be aware of.  I would always recommend local representation.  Hope this helps.

@Taylor Valle

Do you care about liability protection at all? If you do not form a limited liability entity (LP, LLC, or S-corp) then you will be deemed to be a general partnership. Joint ventures are treated as general partnerships. General partnerships do not provide any liability protection. If you do form a limited liability entity, and you are CA residents, chances are you are "doing business" in California and will be subject to the $800/year minimum tax. This is still the case if you form your entity in another state. Will this be buy and hold or flip? Are you each putting in cash or is one person putting in services?

As for what state to have your relationship governed by, seems it would depend on what types of disagreements/issues you are most concerned with.  If you are more worried about tenants, maybe it makes sense to have your entity formed in the state where you are doing business/owning property because lawsuits with tenants would likely be in the state where the property is located.  

However, having a CA agreement can have significant benefits in your case to govern possible disagreements or future issues with your friends such as who can transfer your ownership interest, what if one person wants out and the others want to stay, what if the entity needs money but only one party can provide funds, what sorts of decisions require unanimous agreement and which can only one person decide, what dollar amounts require two signatures on a check versus one signature, etc.  Since you are all located in California, if it came down to going to court, you likely would not want to fly to another state to have your disagreements heard when you both live in Nor Cal (though is possible CA would have jurisdiction even if you formed in another state).

These are all things you can ask your attorney and CPA and get personalized advice for your situation.

*This post does not create an attorney-client or CPA-client relationship.  Readers are advised to seek professional advice.  The information contained in this post is not to be relied upon.

@Taylor Valle

In my opinion, there is no reason to form a general partnership when you can form an LLC that is taxed as a partnership. The only exception I suppose is for CA folks like you since you guys pay that minimum tax. I would probably still say it's worth it to open an LLC since general partnerships fail to protect from both external and internal liability. Meaning if one of your partners does something stupid, you and your husband might be personally liable for the stupid action.

Whatever the case, you may want to have two separate entities. It's not uncommon for the real estate holding LLC to be a separate entity from the entity that owns it. So you can have CA LLC that governs the relationship between the members. The CA LLC would own the PA LLC. The sole job of the PA LLC is to own and operate the underlying real estate.

But if I recall, you would now need to pay another $800 a year for the PA LLC. That seems absurd but that was my understanding of the law the last time I checked. I suppose it's the price one must pay for living in the lovely state of California!

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Katie Lepore

Thank you for the fast response Katie. Yes we do care about liability protection. The plan is to open an llc. This will be a buy and hold but we may sell off one of the four units. We are all putting in the same amount of cash.

@Taylor Valle

It probably makes sense to use a Pennsylvania Attorney for the PA LLC. My guess is that you would probably want it to me a single member LLC with the CA LLC being the sole member. But hard to say without looking at all the facts.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.