50/50 Exit Strategies & Protections Against the Unforeseen
6 Replies
Kevin Danikowski
Rental Property Investor from Chicago (suburbs), IL
posted 6 months ago
My partner and I are going to purchase a buy and hold 10 unit where everything is divided 50/50 (money, work, etc.) and a management company holding it. I would like to know what are main safe guards which 50/50 LLC partnerships typically put into place.
Lets say all goes well and then an unforeseen event occurs to one partner...
1. What should happen if more money is required and one partner can't pay up? (maybe a 10% penalty to a certain point?)
2. What should happen when one partner needs to leave/exit? Or one wants to sell and one wants to hold? (Maybe a 20-30% penalty for early exist or early buyout policy)
3. What should happen if one partner gets a divorce and needs to liquidate? (penalty again?)
4. What is one partner goes into bankruptcy? (no idea...)
5. What is one partner dies and new agreements can't be made from the heirs?
6. What is the area turns to crap because of something unforeseen and we can't agree on changing or keeping the plan?
7. What is one partner feels the other isn't putting in the work?
Any legal advice or past experience is appreciated.
Avery Rustad
replied 6 months ago
https://www.youtube.com/watch?...Below I have linked a few resources that you could check out. The first link is a post made by Ali Boone in 2015. The second is a video made by Canadian REI, Matt McKeever. As you'll see, the last video is made by Brandon Turner himself. Check them out. Hopefully these videos will help you out or at least lead you to more resources that can assist you in different regards :)
https://www.biggerpockets.com/blog/2015-12-03-structuring-partnership-rental-properties
Kenneth Garrett
Investor from Palatine, IL
replied 6 months ago
This is why the operating agreement is so important with a LLC partnership. The agreement essentially is to address the what if scenarios. It is designed to handle all of your questions you have addressed. Have an attorney assist in developing the OA. There is never a problem when everything is just fine, the OA is for everything else.
Kevin Danikowski
Rental Property Investor from Chicago (suburbs), IL
replied 6 months ago
Originally posted by @Avery Rustad :https://www.youtube.com/watch?...Below I have linked a few resources that you could check out. The first link is a post made by Ali Boone in 2015. The second is a video made by Canadian REI, Matt McKeever. As you'll see, the last video is made by Brandon Turner himself. Check them out. Hopefully these videos will help you out or at least lead you to more resources that can assist you in different regards :)
https://www.biggerpockets.com/blog/2015-12-03-structuring-partnership-rental-properties
Great links for insights of the starting portion, but it doesn't answer any of my questions of leaving the partnership and issues that may come up, this is why I posted the discussion, the questions I listed I have not found an answer to yet.
@kennethgarrett I definitely will have a lawyer work this out, but just to prepare myself and not just take them at their word, I was looking for some insight before hand. But you are totally right, the OA is very important to structure correctly.
Avery Rustad
replied 6 months ago
@Kevin Danikowski glad you found use in those links! Good luck with your partnership. If you have any other questions just reach out and I’ll be happy to do some research :)
Schuyler Witt
Investor from Sneads Ferry, NC
replied 6 months ago
All of the above offered advice is great. I would add to specifically answer your #1 concern, if the partner can't make a committed payment (personally or by securing additional funding) levying additional expenses on him is going to make his personal situation worse. I would add verbiage to your OA that cited if a partner could not contribute a required amount of equity for a future project (capital expenditure, improvement, etc.) then he gives up a % of equity in the company as you add equity to the company.
Kevin Danikowski
Rental Property Investor from Chicago (suburbs), IL
replied 6 months ago
Originally posted by @Schuyler Witt :All of the above offered advice is great. I would add to specifically answer your #1 concern, if the partner can't make a committed payment (personally or by securing additional funding) levying additional expenses on him is going to make his personal situation worse. I would add verbiage to your OA that cited if a partner could not contribute a required amount of equity for a future project (capital expenditure, improvement, etc.) then he gives up a % of equity in the company as you add equity to the company.
I like that solution more than what I suggested, great idea. I think we could extrapolate this for the other situation as well, if either partner expresses need to leave the partnership, they can voluntarily sell ownership at a specific discount perhaps. Maybe this way it would entice the other partner to buy them out so that if they're in a bad situation, they can get what ever relief is necessary. And in the event of passing, then all deciding rights of the company are left to the remaining partner. Just throwing out some ideas.