Value of Attorneys in Partnership formation?

12 Replies

For anybody who has experience working with real estate attorneys in regards to forming a partnership, can you share a rough estimate on what they charged you per hour? My partner & I are looking setup an Operating Agreement that lays out our BRRRR partnership details. Overall a pretty straightforward partnership with nothing overly complicated. Would love to hear any opinions on the matter and value (or lack thereof) you've seen.

$2500 for all of the work; setting up the corp, getting the tax ID number and doing the operating agreement.  Filing fees due to the state were over & above the $2500.

@Luke Grieshop

I think attorneys are needed for the most part. However, If everything goes as expected and it is a short duration you might not need one. They add value if you have an experienced attorney. They help you see what other problems you can run into. What happens if one partner dies do they get bought out or are they now partners with the heirs? What happens if market goes south? How do you end the partnership? Does one partner have more than 50% ownership? How are differences decided? Is there a general partner? Etc etc etc? How are taxes handled? Who does the partnership tax returns?

To save money, meet with your partner and, discuss as many contingencies as you can think of. Document each issue how you want them handled-you and your partner initial them. Then interview attorneys to get one with a lot of experience and pick one, schedule a meeting with partner and attorney, review your points on the document see if you missed anything and let him draw up(Legalese it) the agreement With the salient points you both wrote down. Hope all goes well but have your paper done like you are going to court. I’ve seen too many partnerships and marriages fall apart. More fail than make it. Spend a little $$ up front and it can save a lot down the road. 

Thanks again, @Carl Fischer that is very helpful. Gives us a good idea on what fee we're looking at right now. In case you know the answer to this, I do have one more quick question, as it sounds like you're familiar with these things. In a real estate investing, single family 50/50 partnership, do you have any insight into whether it is more advantageous to setup an LLP as opposed to an LLC? Essentially I purchase the asset in cash, and my realtor-partner is responsible for funding repairs and overseeing the project. We then get financing once improved and split all expenses, income, and equity on the rental 50/50.

@Luke Grieshop

Your post was titled "value of attorneys" but you actually asked about the cost of the service. These are two totally different things. The value of a (good) attorney in drafting partnership documents is preventing catastrophic problems down the road when things do not go as expected (hint: they rarely do) or when you and your partner stop seeing eye to eye (hint: happens as often as spousal conflicts and subsequent divorces, which is pretty often).

In fact, partnerships are very much like marriages in every other respect, too. So, what is the value of prenuptial agreements? 

If I had a nickel for every horror story related to partnership rifts, I'd be retired 10 years ago. This includes lots of partners who assured me they would NEVER have an issue because they ____ (fill the blank: grew up together, were frat brothers, served together, it is different in their culture, etc.)

And remember that a lot of factors are out of our control, including losing a job, car accidents and Covid. Any partnership needs to plan for all possible scenarios, especially for the worst ones. Because they happen. 

If you can avoid a 50/50 partnership, do avoid it. The best thing is for you to own the asset 100% since it's your cash and treat your buddy as a contractor. If this is impossible, try to retain the majority stake. Details are up to an attorney, and I'm not one.

Forget LPs, LLPs and all other more complex entities. Stick with an LLC, unless your attorney gives you some compelling reason to form something other than an LLC. Which is unlikely.

@Luke Grieshop

Think about borrowing the money needed for repairs and hiring a project manager or contractor

Why do you need a partner? What is the partner bringing to the relationship that you can’t purchase?But if you do need one don’t give up control -keep more than 50%. Make it 52/49.  As @Michael Plaks advised an LLC should suffice. The entity Type probably isn't as important as the operating agreement.

In considering hiring an attorney, one should ask am I looking for an attorney for the whole partnership/LLC entity or just myself? When an attorney represents all the partners in forming an entity, he/she has a potential conflict of interest that he/she will ask the partners to waive in advance, will advise the partners of their right to seek their own seperate attorney and will attempt to try to balance the interests of the partners without giving individualized advice. Most potentially sticky issues having to do with entity formation involve potentially competing rights and remedies between the partners themselves. If you are looking for an attorney to represent solely your interests and not those of your partners, it is a lot easier for the attorney to give frank advice as he does not need to take into account the interests of your partners.