property manager part owner

11 Replies

I have a Property Management co. i have been using for the past 4 years, they have been great, but they were bought out this year and now the new owners have sent me new management agreements for all my properties, Garbage. I went through it and marked it up and it's now in an attorneys hands to write a new one. i have to negotiate with the PM co. yet but i am talking to another one in the mean time. my question is, if i brought someone on and made them a 10% partner in each business ( with no rights to the properties themselves), which would make them part owner of the co. my thought is they would be legally able to negotiate contracts and they would run the businesses side of the co. i see this as a way around them getting a broker license and they would not be considered an employee. that person can then do the same for other big investors in the area and make a decent living on it. anyone have any thoughts if this is a good idea or bad idea? or if i am looking at this wrong and legally can not do this?

Sounds reasonable to me. I have pondered the same.

Hi Patrick

I think you are correct (think = I am not a real estate lawyer in PA) that a partial owner can manage properties.

 I  have thought about offering/engaging with other investors to buy/manage properties.  We have 60 units in Pittsburgh and we manage all everything.

Hey Patrick, hopefully we get a PA lawyer or CPA to chime in. This is something I’ve thought about also. My question about the 10% (or 1%, 5% or whatever), wouldn’t that person be responsible for their percentage of the expenses and receive their percentage of the rental income also? Even if they didn’t actually take that income or pay those expenses, they would probably have to show it on their taxes. You had also mentioned that the partner would have “no rights to the properties themselves”.  Technically I would think that’s where the percentage of ownership comes in that allows them to manage those properties. And being any percentage owner, wouldn’t that need to be recorded on the deed as well?  My understanding is that person could just be an employee of the property owner also and do it that way, but then I’m assuming that opens up another whole layer for taxes, etc. This is a great topic Patrick! Looking forward to the feedback.

@Keith Leckey   those are all factors i would still have to work out, but my thought was that we structure the company in a way that their commission from the co. would be 10% of the gross rental income ( just like a property manager would get) and their responsibility in the co. would be to run the day to day activities of the business. all they would have to do is show the income on their taxes, i believe, but you do bring up a good point and will have to talk to my CPA and Attorney on that. as far as the property itself, they would not have to be recorded on the deed, they could become partners of the company internally, the co ( llc.) owns the property, not me personally, but if you structure the agreement so that they have no rights to the asset but only the company then that protects you from " sharing" that asset, that is something i would have to figure with an Attorney before i offered the person this idea.

@Brandon McLean thank you for answering, hopefully we will get a lot more responses

@Mark OGara Thanks for the response, my properties are in central PA, about 3 hrs from you, and 3 hrs from me, so having a good Manager is essential to me.

This can work but the devil is in the details.   Give them 1% and have all your lawyers legalese to allow you to get rid of them at will without getting sued.   You might want to let a couple of lawyers look at your agreement to make sure you don’t miss anything

@Josh Caldwell , thank you, yes i will definitely have any agreement checked over to make sure i dot my T's and cross my i's. i have to make sure there is no way they can claim any more than whats agreed to, especially the asset of the co.

@Patrick Liska

One issue you want to think about is complications with 1031 exchanges. LLCs taxed as partnerships can sometimes raise tricky issues. 

In terms of avoiding the broker requirement, I don't see anything in the law that says you can't do this. But I haven't seen any appellate case on the matter. You technically don't need to make the person a 10% owner --- even a 1% ownership should qualify. Note that you can separate out the ownership interest in an LLC from the economic interest in an LLC. For example, a person can be a 1% owner of the LLC but entitled to 10% of the economic interest.

You and your attorney will need to be careful about the process of "firing" this property manager. Because the person is an owner and not just a property manager, you cannot just fire this person. Your operating agreement must instead have some kind of provision that allows you to buy his or her interest. That may require you to pay this person some amount at the time of the buyout. 

I suppose the arrangement can also create some issues with financing. If you currently have mortgages, you may need to notify all your lenders that you are adding a business partner to the mix. They may be okay with it but I would check with them before you commit. 

The arrangement could raise some liability concerns. When you hire a property manager, the manager is a separate entity from your LLC. That's no longer true since the property manager is also a minority owner of the LLC. This fact may increase your liability concerns although I'm not sure to what extent. I'll have to think about that.

I'm sure there are many other issues you would need to think about. But those come to my mind initially. 

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 as legal advice. Always consult with your attorney before you rely on the above information.

@Chris K. , thank you, great advice as usual, I actually have an agreement like that with my brother, he and his wife are part owners in one of the properties and I have an agreement that each one can buy the other out depending on the value of the business/ asset and the equity in it. But that is a good point as far as not firing and having to buy them out. The property manager will not be a separate company, but a person that I give a percentage of the company too. I like what you and @Josh Caldwell said about only giving 1%, this would help limit their stake in the company.

@Patrick Liska

Let me know what you find from your lawyer. This is an interesting topic. 

In any event as everyone stated have a lawyer review the docs. Having them be a partner might be cumbersome if they have any say in the operations/claim to profit. 

Also, as Chris said above you couldn't just fire this person which would make things complicated again. 

@Anthony Angotti i will keep you posted on it. it turns out the PM i am using is re writing their agreement for me, we will see what they come up with and another PM that is trying to get my business keeps giving me better prices and terms. I will be meeting with my Attorney on another matter next week but i may get some answers before than and will let you know when i do.

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