Posted by ray@lcorn on February 09, 2010 at 17:31:47:
In Reply to: Buying INTO a property posted by Mark (SDCA) on February 08, 2010 at 12:16:25:
Hi Mark,
Don't know what you consider "obvious partnership issues" so I'll comment on the major points I spend the most time on when structuring our own LLCs. Beginning with the end in mind is a good guide.
So... Number One on my list is how to get out. Pay close attention to the Operating Agreement regarding the terms of divestiture. Since you're buying a share I assume there is a mechanism in the agreement to allow outside purchases, but ask your seller if he had to go through an offer period to existing partners before he could sell to an outside entity. I've seen some cumbersome conditions in Op Agmts for time allowed for the other partners to act and for how the valuation is done that cause problems.
(On valuation, beware the "one cuts the pie and the other chooses the piece" method of offering interests for sale. It's usually constructed as a provision that one member prices the interest and the others choose whether to pay that amount or sell for that amount. Sounds good in theory, but in practice it can make it very difficult to get out or get control.)
The second issue is the treatment of liquidity events. Most folks only think about distributions, and that is important. But equally important is cash shortfalls. Where's the money come from? Is your interest subject to capital calls? How are sale or refi proceeds distributed?
The third major issue is the the tax treatment of the membership interests. They don't necessarily have to be distributed the same shares as cash distributions, and in fact a lot of syndicated deals are constructed to distribute depreciation unequally, e.g. a case where one or more partners contributed property and others contribute cash. Depending on your tax situation this can be a benefit or a liability. Also, how are capital gains distributed on sale?
Next point I'll make is the number of partners in the deal. This doesn't bother a lot of investors, but my personal preference is the fewer the better. A friend of mine has a rule of thumb that if you can't fit all the investors around a restaurant table there's too many. The third of the "3D's" (death, divorce, dissolution) of the source of distressed sale opportunities involves unhappy partnerships that can't agree on what day it is. If there are any supermajority voting requirements in the Op Agmt it only takes a couple of holdouts to create a situation not unlike extortion.
Last issue is the nature of operations. If there are employees or payroll make sure you can verify all payroll tax deposits are made and there are no outstanding issues with tax authorities. This is actually the main reason folks don't want to buy entities... the vulnerability to liability for any past actions of the entity. Think slip and fall lawsuits where negligence is claimed by the insurance carrier, equal housing violations, environmental issues, etc.
Bottom line, read the Op Agmt line by line. Underline things that jump out at you, then review with your legal counsel and tax advisor(s).
ray
- Re: Buying INTO a property Gary 20:03:24 02/20/10 (0)