A real estate partnership agreement is an important document to have in order to protect your interests. It will outline the terms and conditions of your investment and the rights of each party involved. These include your duties, the rights and responsibilities of the partners, and the distribution of profits and losses.
Divide duties and responsibilities
One of the most important aspects of a real estate partnership is the allocation of control. As such, you may need to put a contract to work. Aside from the obligatory legal agreement, it is imperative to enumerate each of your partners’ interests in a manner that they understand. If you have the foresight to create a formal agreement, it can take the sting out of disputes. Whether you are a single partner or a multi-proprietor real estate conglomerate, a formal document of record can help to alleviate the inevitable. It can also serve as a guidepost for future deals. After all, it is difficult to have a healthy and profitable business without a nudge in the right direction. However, it can be difficult to ensure that all parties are on the same page, especially if you’re a solo squatter. With a well-drafted contract, you can take the stress out of your business and concentrate on the task at hand. Moreover, it is also an opportunity to build a more rounded relationship with your business associates.
Allocation of profits and losses
A real estate partnership agreement can include provisions dealing with allocations of profits and losses. These can vary in size and complexity, so it’s important to consult an experienced attorney to ensure that yours complies with the law. Here’s a quick overview of the major issues.
First, let’s look at the targeted tax allocation. This is the provision that allocates net income to capital accounts. The target is to allocate minimum gain to each partner’s targeted capital. The IRS will then tax each partner as if they had divided the profit in proportion to their ownership interest.
Second, you may want to consider a targeted tax allocation that allocates a small amount of taxable gain. For example, if you sell a commercial office building for $900, you wouldn’t realize a taxable gain. However, if you sold the property for $700, you’d realize a taxable gain. If you were to split the difference in half, you’d receive $250 in cash and the remaining $300 in a check.
Finally, you should discuss a targeted tax allocation with your tax adviser. Whether you’re an attorney or a business owner, it’s a good idea to understand the tax implications of your partnership. Having a clear grasp of the financials will help reduce the risk of complications later on.
You should also consider an operating agreement’s language. For example, there might be boilerplate language that states that nonrecourse deductions are allocated in accordance with ownership percentages. While this may sound like a clever measure, it can actually create distortions.
Targeted tax allocations may not be suitable for every deal. However, it can be a good way to make your clients feel comfortable about the tax aspects of your partnership.
To make it even more effective, you may need to allocate more than just profits and losses. Your operating agreement can specify the allocation of other items such as nonrecourse deductions, which can be allocated in any ratio. As long as they’re allocated in a way that’s consistent with other significant partnership items, you’ll be on your way to making tax sense of your partnership.
Fiduciary duties are a part of the relationship between partners in a partnership. It is important for both parties to act with honesty, loyalty and fairness.
These duties vary depending on the nature of the partnership. A partnership is a relationship between two or more people, which is carried out for the profit of all the partners.
When the partners are acting as fiduciaries, they are required to put the interests of the partnership above their own. This means that they are expected to use due care when making business decisions. They must also disclose any conflict of interest they may have.
Fiduciary duties can be defined by a state statutory law, judicial precedent, or a partnership agreement. Depending on the situation, the extent of fiduciary duties may be limited or unlimited. However, there are certain duties that are impossible to waive.
Most partnerships require one or more general partners to exercise fiduciary duties. These duties include the obligation to act in good faith, to provide complete information to all partners, to avoid grossly negligent conduct, and to refrain from taking advantage of other partners.
If one partner breaches his or her fiduciary duty, the other partner can be held liable. The damages can be financial or legal. In addition, if one partner violates the other’s fiduciary duty, the managing partner may be held liable.
One of the most basic fiduciary duties owed by all partners is loyalty. The duty of loyalty requires each partner to act in good faith, in the best interest of the business, and to be honest.
Another fiduciary duty is to avoid a conflict of interest. All partners are required to disclose their assets, daily operations, and other matters that could lead to a conflict of interest.
A partnership cannot operate if one or more partners do not exercise their fiduciary duties. For example, if the business is in a crisis and a majority partner chooses to sell the business, it is not considered a breach of fiduciary duty.
If a managing partner fails to act in good faith or breaches his or her fiduciary duty, that partner is liable for any loss or damage incurred. Also, a breach of fiduciary duty could make a managing partner liable for legal fees or other expenses.
The Amendments section of a real estate partnership agreement should include the signatures of all business partners. It should also set forth a record date and the notice provisions, including any consent without a meeting. In addition, the Section may also provide for voting rights and other restrictions, as well as specify the requirements for quorum.
The General Partner shall cause the properties of the Partnership to be appraised at least annually. For purposes of this Section, unamortized leasing commissions and loan fees are not included. A portion of the gross fair market value of the assets of the Partnership will be allocated to Partners in proportion to their Percentage Interests, as defined by the Code. These allocations are based on the same basis as the book items.
If the general partner has been assigned limited liability for the Partnership, he/she must comply with the limitations set forth in the Agreement and the Leverage Policy. Any changes to the Leverage Policy must be approved by the Advisory Council.
The General Partner is not liable for income tax liability of Limited Partners. However, he/she may take into account the tax consequences of a Partner’s actions. In addition, the General Partner is authorized to enter into financing arrangements with the Partnership. All of these obligations are not enforceable by third parties.
Unless expressly provided in the Agreement, the partnership shall not be dissolved. No partner shall receive compensation for services rendered on behalf of the Partnership. Similarly, no partner has the right to demand that the Partnership return capital contributions. Further, the General Partner shall not allow the Partnership to incur indebtedness in any manner inconsistent with the Leverage Policy.
Under Section 7.2, the General Partner must make reasonable efforts to assure that each Partner’s Capital Account balance will be equal to the Capital Account balance of the other Partners, if the Regulatory Allocations were not set forth in the Agreement. When the Regulatory Allocations are not set forth in the Agreement, the General Partner may not permit the Partnership to incur indebtedness without obtaining the prior approval of the Advisory Council.
Among many other things, David A. Grantham is a contributing author to UmassExtension West Vancouver Blo. He is a renowned expert on real estate in BC.
Born in North Vancouver, Louisiana, Dr. Grantham grew up in Lower Lonsdale. He then went on to complete his business degree at the University British Columbia. As of this writing, Grantham has completed over 100 projects, including the development of a high rise building in Vancouver.
He is a husband, father, son, brother, and friend. He was a dedicated outdoorsman and enjoyed sports such as hunting, fishing, scuba diving, and snow skiing. His wife, Alison Grantham, and their two daughters survived him. He is survived by his wife Alison Martin Grantham and two daughters.