Creating a Partnership that Lasts

Friends Fred, Steve, Gary and Ralph with limits

 

I recently received the following email. The question was so appropriate that I decided to make a post on the topic. 

Good morning Rich, 

          I bought a 100 acre property here in Ontario, Canada in January with three partners. We have known each other for over 25 years and have hunted together forever. We are starting to build our new camp this spring. I have been doing research on the net to find a document we can use and all agree on and sign for our camp. I am looking for something that may cover a member’s sudden death, buy outs, passing shares on to spouses or children, divorce and anything else that may pop up. I joined a few hunting forums to try and get some advise and possibly a copy of an other camps document, but all I seem to get is the old “be careful” speeches and not much more. A lot of people seem to have partnership agreements, but no one seems to want to share them with me. We have contacted a lawyer to draft an official document, but he told us if we could get a document already completed and just modify it to our situation it would be a lot cheaper. Rich, would you have a copy of a partnership agreement that you could share with me?  

Dear Ontario: It would not be appropriate, or much true help, for me to give you a partnership agreement from California. Penny wise and pound foolish would be an applicable phrase. 

I am not the best source to provide you with such a document. I am a real estate broker in California and I do have some experience with partnerships. I also have a copy of a partnership agreement around that I could provide. A lawyer is an expert in the law and also trained at producing clear agreements without ambiguity. Many of the clauses you need for your agreement have stood the test of time and an attorney understands how they apply. I do not do legal work. 

Undoubtedly the laws of Ontario Canada are different from the laws of California, both from a real estate and a partnership prospective. I could be accepting some liability by going so far as to provide a document – and it makes no sense to me to create liability as a blog writer. However, I do have a layman’s experience and I am willing to pass along some guidance – guidance that a lawyer may not provide. 

You must think of the partnership relationship you and your partners want to create. I believe that the best partnerships are created amongst groups that have commonality of goals and also similar starting points. As partnerships age, often the group splits as each individual moves in their own direction.  

Having a common starting point also creates a degree of equality among partners, making it difficult for one person to dominate. And, it creates the basis for common goals. 

Sometimes partnerships create limitations on the ability of partners to sell their interest. For example, partnerships sometimes allow partners to sell out only for their initial cost, plus some accrued interest. This type of partnership creates a situation where partners have little or no profit. Accordingly, there is no motivation to ever sell and little investment incentive. These agreements typically have a first right of refusal agreement built-in so the group or remaining partners have the first opportunity to purchase when an individual partner decides to sell. 

First right agreements tend to devalue each partnership interest. Typically the logic is that control over the membership is necessary to protect that group from exposure to undesirable individuals who could ruin the quite enjoyment of each of the group members. This is understandable. 

However, I am not a fan of this type of agreement. I prefer an agreement that follows typical real estate investment strategies where each individual has a right to sell their interest in the partnership at fair market value. I believe this model produces a better investment incentive for people who have limited funds. Partners are able to withdraw their funds and reinvest when necessary. 

If money is no consideration for any of the partners, or a degree of benevolence is present for some of the partners, the “no profit” concept can work, but this is not typically a healthy partnership situation from my prospective. 

An alternative method of protecting both the real estate business interests of the group and also the quite enjoyment of the hunt club is to create two entities. One group holds title to the property and the other leases the property from the real estate group. The two groups may be exactly the same people or they can be different. 

If a hunting partner wants to sell his real estate interest, he can do so and the protection of the recreational aspect will be provided by the operating agreement between the lessees. And, the lease provides some annual income to create a degree of investment incentive for the investor-owners. 

In other words, create two partnerships. This also adds flexibility to the group. If an individual owner moves away for a while, the group may be able to find somebody to be a lease partner until the real estate owner returns. When he returns he can assume his place in the hunting lodge again. 

If one of the owners gets into a financial bind, he may be able to sell his interest to a non-hunting owner and continue to hunt even though he can no longer afford to be an owner. The purchaser may decide it’s a worthwhile investment based upon the lease income. 

When a property has multiple uses, it’s possible to have hunting and non-hunter partners for other reasons as well. Diversity is often a  good thing. 

The makeup of the partnerships in which I’ve been involved has changed over time, but eventually we  seemed to find the “right” guys and subsequently have remained together for quite a while, despite the fact that each of us has our own unique style. 

It’s quite a bit like marriage. Oh my…..

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