3 things to consider before creating a real estate partnership

  Happy New Year from the OakGrove team!  As we all look into 2022 and chart our goals and aspirations for the coming year, we start to think about what we want to accomplish and WHO we want to accomplish our goals with.  No one person is an island.  Any audacious goal that we set for ourselves is going to involve the alignment with other people and leveraging others talents.  These people can be employees, vendors, lenders, professionals, investors (limited partners), and/or general partners.  What I want to focus on in this post is partnerships.
Partnerships, when structured correctly by your legal and accounting professionals can be an incredibly effective way to scale a real estate business or any business for that matter.  Partnerships, in an ideal world, can leverage core competencies of its members and create an alignment of interests towards a common goal, while sharing in the risk and reward on a particular venture.  For example, if you are a real estate developer or investor like OakGrove, you might be very good at finding new investment or development opportunities and raising the funds within which to take advantage of those opportunities, but you or your organization might be very lacking in the skill sets of project management and construction that is needed in order to successfully execute on a plan for that opportunity.
No one individual or organization is extremely good at everything and sometimes creating a formal partnership with someone who counterbalances your weaknesses can be very effective in lowering the risk of a given project and increase the probability of success.  As an individual, I have created partnerships with several individuals and organizations throughout my years.  Our company continues to create partnerships with investors, contractors, and even other development companies.  Some of these partnerships have been huge successes.  Some of them were successful but created a ton of heart break and brain damage in the process.  Some have been absolute disasters.

What we have learned in this process is a few things that we hope that will help you in scaling your business through partnerships.  For the purposes of this blog post, I define Partnership as a limited liability company between two or more members.

1. A partnership is not unlike a marriage.  Getting married is not something to trifle with.  It's serious business!  In order to be successful, it requires a crystal clear understanding of what the goal is.  For instance in the case of marriage, is it both your goal to have kids some day?  If either partner is not on the same page with their goals and vision, things might start off very rosy but won't end well.  Is there a clear understanding of the roles and responsibilities of the partners?  After all you didn't partner up to do the same exact thing.  You did so because the partner or partners possess skill sets that differ from yours and should complement the team effort and create synergies.  I have seen all too many partnership fail because the roles and responsibilities were not clearly defined.  This usually results in disfunction, a wasteful duplication of efforts, confused branding to your clients and customers, and often times one partner feeling like they are pulling all the weight in the organization.  The roles and responsibilities should be clearly spelled out in your operating agreement.  The point of all of this is: take your time before entering into a formal partnership with someone.  Take some time to "date" and discuss these things before you "tie the knot."  Also be mindful of why you are desiring to partner with someone.  By all means, do not consider a partnership from a short term position of weakness or because you just felt really good about someone after meeting with them.  Hastily consumated partnerships usually end in haste.  The partnership of myself and David Martin (co-founder of OakGrove) happened after months of meeting weekly to discuss all of these things: personal and professional goals, roles and responsibilities, and defining our values.  I even brought him to meet my family before we signed on the dotted line!
2. Consider Alternatives To A Formal Partnership.  Whether you are considering partnering with a friend, acquaintance or trusted vendor, I always recommend what I call "partnership lite."  Find something small and low stakes you could work on with that person to dip your toes in the water before creating a formal partnership.  This could be something as simple as putting on an event together (like a meet up or seminar), or working on a community project or initiative with a non profit organization, or really anything that you could collaborate on that would give you an opportunity to have an alignment of interests towards a common goal.  This type of arrangement will give you the opportunity to see how you work together in real life; to see what your individual & team strengths and weaknesses are, to see does this person really walk the talk or toe the line when the rubber hits the road?  Then after you have completed this objective together, have a candid debrief together.  What could have been done better?  What did you do exceptionally well together?  How is your dialogue when you give and receive constructive criticism?  Even if what you did together ended up being a complete disaster, think of this... Were you are able to learn as a team unit, have constructive dialogue in a debrief without either party's ego being bruised?  Then it might be worth considering doing something again, but much better on the next go around.  But before considering the next move being a formal partnership, you might want to think about something higher stakes but not "getting married".  You might want to consider a joint venture as an alternative.  A joint venture is different from forming an LLC.  Instead of creating an organization, you can have an attorney draft a joint venture agreement for a specific project.  Let's say you are thinking of partnering with a general contractor on a house flip.  Instead of forming a partnership LLC (Limited Liability Company) with your contractor, you should negotiate a joint venture agreement with them that would have the terms of your profit/loss split, roles and responsibilities, etc.  Let's say there is a house you want to rehab together and you both agree in exchange for you finding and funding the deal, your general contractor agrees to carry their labor cost until you complete the rehab and close the sale of the property.  At that point in time, their labor cost would get paid out first and then you both would have a pre-negotiated split of the gross profit after the project is closed.  This joint venture agreement acts in the same way as a partnership agreement but if things go sideways, it's easier to lick your wounds and move on from the learning experience than if you created an LLC together.  For example, let's paint a scenario.  Let's say your general contractor abandons the job and disappears half way through the project.  If you had a partnership LLC with them, they would still own whatever percentage membership interest that you negotiated in the operating agreement regardless of their performance.  They could even stop you from selling the property if they owned a certain amount of your company.  Most sale of real property in a partnership agreement requires a resolution of the members.  What if they refuse to sign that resolution even if you have a ready willing an able buyer for the property; even after you had to dump your own money into the property in order to complete the job they abandoned?  If you don't think this type of stuff happens, think again.  Under a joint venture agreement, if this same thing happened, you would own 100% of the property and have much better control to get things back on track.  You would still have a half completed project, but now you have the power to get another contractor on board, pay them yourself; complete the project.  Just remember to speak to your attorney before you do anything major so that they can properly advise you on how to proceed after you have determined that things aren't going to work out in this joint venture.  This is important, because you want to be prepared in the event that your original contractor decides to sue you or file contractor liens on your property.  You will also want adequate documentation if you decide to have an attorney mediate whatever dispute you might have together.  I know this all sounds scary but an ounce of prevention is worth more than a pound of cure.  You want to consider all the scenarios and have some idea of how you will respond when something bad happens.  And ALWAYS ALWAYS ALWAYS, consult with your own legal professional when structuring business agreements.  Don't take my advice.  I am not an attorney.  I'm just a real estate guy who has gotten his teeth kicked in several times in his career.
3. Partnerships Are For Growth.  Remember to always have the right "why" behind formally partnering with someone.  I know this sounds obvious but I see way too many people get into partnerships for all the wrong reasons.  If you want to do it because you think it will be easier than what you are doing on your own, you are fooling yourself.  Partnerships are hard.  So why do it then?  It's because that hard work on developing a partnership with someone will allow you to collectively grow much larger than if you were doing things on your own.  The whole is greater than the sum of the parts.  But don't do it because the motivation is to do some deals together here and there.  If that's the motivation, then consider a joint venture structure instead.  The reason for partnership is collective growth, hopefully exponential growth.  And besides for that, when you have a partnership LLC with someone, you will probably need to file annual tax returns regardless of whether you did anything with that LLC in that tax year or not.  Your CPA Accountant does not file tax returns for free.

Also when you partner with someone, make sure you have an exit strategy clearly negotiated with your partner(s) on the front end.  For reference, I did a post on that topic here.
http://www.oakgrovecompanies.com/roc-blog/how-to-set-up-an-exit-strategy-from-a-real-estate-partnership
I hope this was helpful to you.  We would love to hear your real estate or financial goals.  Talking real estate and money is a passion of ours so if we can help in anyway, please don't hesitate to connect with us!

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