A Brief Introduction About the Real Estate Partnership Agreement
When you are interested in becoming a real estate investor, it is advisable to enter into this agreement. All the partners in such agreements pool in their resources and capital. The management of the real estate, including the costs, is shared among the partners as well as sharing the revenues from the investment. The rights and responsibilities of all partners are mentioned in the agreement.
A real estate partnership structure refers to the legal entity where two or more real estate entrepreneurs work together as partners by investing in commercial real estate to make a profit. In real estate, the limited partnership is a business structure where a limited partnership entity is formed to invest in real estate. The business will be operated and will have to pay the statutory taxes as per the laws applicable to a limited partnership. A real estate joint venture agreement is entered into when you want to enter into a partnership as a one-time venture. Once the venture is complete, you part ways.
Who Takes the Real Estate Partnership Agreement? – People Involved
The parties to such agreements are real estate investors who wish to jointly invest in commercial real estate to share the costs and revenues. The partnership could be for one particular venture in which a joint venture is entered into, or it could be a limited liability partnership.
Purpose of the Real Estate Partnership Agreement – Why Do You Need It?
This agreement ensures that all the partners involved would get their fair share of profits. Each partner has to make a capital contribution and would expect a minimum return on investment. There may be a dispute between the partners about the sharing of profits and losses unless the rights and responsibilities of the partners are defined.
The partners in a partnership agreement cannot get involved in any other business other than that mentioned in the agreement. If there is a breach of contract by any of the partners, then the remaining partners can take action against him or her. It could be a misuse of funds or violation of any other clause.
If the partners in the business are not able to perform well in comparison to the other partners, you can terminate his or her association with the partnership unless there is a partnership agreement in place. If there is an agreement, then the non-performing partner can be removed from the partnership for nonperformance.
If the regulatory authorities find that the investors are running a real estate business without maintaining the records and filing the returns as required in a partnership, the partners will be penalized, and the partnership terminated.
Contents of the Real Estate Partnership Agreement – Inclusions
These agreements should contain all the information relating to the real estate partnership as well as the partners.
The contents of this agreement are as under:
- Partners to the Agreement: The names of the partners to the agreement.
- Effective Date: The date from which the agreement becomes effective.
- Partnership Name: The registered name of the partnership. All property shall be held in the name of the partnership.
- Purpose of the Partnership: The sole purpose shall be the acquisition, development, or any other activity related to the property. No other business can be entered into by the business.
- Principal Place: The registered office of the business from where the partnership operates.
- Tenure of the Partnership: The term of the partnership mentioning the starting and the ending dates.
- Form of Partnership: Whether the partnership is in the form of limited liability or a joint venture.
- Individual obligations: The partnership is a separate entity and no asset belonging to the partnership should be used to settle any obligation of an individual partner
- Statutory compliance: The partnership agreement shall be drafted in compliance with the laws applicable to the state. All filings and disclosures shall be by these laws.
- Independent Activity: A partner can engage in a business or activity independently and cannot be held liable to the partnership for this income or be required to disclose it.
- Capital Contributions: The capital contributed in cash by the managing partners.
- Distribution of Profits and Losses: The profits and losses of the partnership shall be distributed among the partners in the ratio of their capital contributions.
How to Draft the Real Estate Partnership Agreement?
Here are the points to be considered while drafting this agreement:
- Who are the parties to the agreement? The agreement is entered into by two or more real estate investors who are partners.
- What is the purpose of this agreement? The investors want to jointly invest in commercial real estate and share the profit and losses according to their capital contribution.
- What is the business structure being adopted? The business structure could be a joint venture for a one-time association, or it could be a limited liability entity.
- The Term of the Agreement: When will the agreement be effective, and when will it be terminated.
- Separate entity: The partners cannot use any asset of the partnership for payment of their obligations.
- Governing law: The laws of the state which govern the agreement and according to which all filings and disclosures need to be made. All records and documents should be maintained by these laws.
- Title to Property: The partners are not permitted to have any ownership interest in the partnership property.
- Partnership Signatures: Space should be provided for signatures of the partners denoting agreement with all the terms and conditions.
[Also Read: Joint Venture Agreement]
Negotiation Strategy
In a partnership agreement, the capital contributions and share of profits and losses are all determined before the agreement is drafted and signed. You need to negotiate the capital contribution as well as your share of profits or losses with the other partners to the agreement before you sign it.
Benefits and Drawbacks of the Real Estate Partnership Agreement
The benefits of a real estate partnership agreement are as under:
- Protection of interest: The interest of the partners is protected by this agreement. They will get their share of profits according to the capital contributions made by them, provided they don’t violate any clause of the agreement.
- Independence for partners: If the partners in their capacity or as partners in this partnership are engaged in a business which could be a competitor for the partnership, the other party is not accountable to the partnership for this income. This gives the partners the flexibility to pursue some other activity and increase their income.
- Transfer of interest: In the event of the death of a partner, there is a provision for transfer to the legal heirs of the partner.
The drawbacks of a real estate partnership agreement are as under:
- A partner leaving the business: A partner could decide to leave the business, and the partnership could bring in a third party as the partner. There could be problems with the third party as they could have separate views about operating the business or sharing of profits.
- Misuse of funds: There could a partner with malaise intentions who may use the partnership funds to pay off personal debts. While the other partners may take legal action to remove the partner, getting a new partner would be difficult.
What Happens in Case of Violation?
In case of violation of such agreements, the partner who has committed the offense will be approached by the other partners to inform him or her about the violation. They will then discuss the issue with him or her to find out if it can be amicably settled. For example, if the errant partner has been found guilty of misuse of funds, they could ask him or her to return the funds to the partnership and resolve the situation.
The next step would be finding out and collecting evidence in the form of withdrawal of funds without corresponding investments in the partnership, which would be sent as an attachment along with a letter to the partner who has committed the offense. If, after taking these steps, there is no remedial action taken by the offending partner, then the other partners will have to file a suit against him or her in the court of law. The partner would be expelled from the partnership and would have to pay the penalty along with legal costs incurred by the other partners.
If all the partners to the agreement are involved in a breach of contract, then according to the laws of the state, the agreement would be deemed null and void.
A real estate partnership agreement is mandatory if you want to be a real estate investor.
The agreement outlines the rights and responsibilities of all the partners to the agreement. You are clear about your capital contribution to the business and, consequently, your share of profits and losses. You are protected by the laws of the state, and in the event, if you find that there has been a deviation from the agreement, you can take the other partners to court.
It is important to remember that the partners and the partnerships are separate entities and that funds of the partnership cannot be used by the partners to settle their personal debts/dues. However, if you are engaged in a business in an independent capacity that might be a competitor to this partnership, it is not considered unlawful. The partnership cannot hold you accountable for this.
It is, therefore, crucial for all the partners to the agreement to read all the terms and conditions before signing it.