How to Structure Partnerships in Commercial Property Investments
Investing in a commercial property is one of the most lucrative options for those seeking high long-term returns. Yet, it requires huge capital and knowledge about the industry to operate and get the best returns, making ownership challenging for many investors.
One of the best ways to tackle such obstacles is by forming a partnership. However, before you begin, there are a few processes you must consider in a partnership, such as contracts, finances, roles, and more.
So, today, we will cover how you can structure partnerships in commercial property investments.
Choose the Right Partner
Your first step is to choose the right partner for your business who shares similar investment objectives. Look for someone who brings different strengths, such as financial expertise, property management skills, or market knowledge. Having a trustworthy, reliable, and experienced partner in real estate investments increases your chances of accomplishing your goals.
Select the Legal Structure
Next, choose the legal structure for your commercial partnership that’ll help you balance liability, tax efficiency, and operational feasibility. Here’s more in detail:
- General Partnership (GP)
First, we have general partnerships, which are among the most common partnerships for investment. In this structure, two or more partners have equal investment and, as a result, equal responsibility for the overall management of the property and liabilities.
- Limited Partnership (LP)
This type of partnership structure includes general partners, who manage the investment expecting unlimited liability, and limited partners, who contribute funds but have limited liability. This option is especially favoured by those who want to avoid risk but also benefit from property income.
- Limited Liability Company (LLC)
An LLC structure provides liability protection and allows for flexible management and taxation benefits. Here, liability is limited for all members.
Define Roles and Responsibilities
If you aim to have an effective partnership, you will need clear guidelines for roles and responsibilities.
For instance, the managing partner can handle day-to-day activities, property management, and decision-making. Likewise, the financial partner can make capital investments and oversee the property’s economic performance. In addition, a strategic partner could bring industry expertise, market information, and contacts to the business partnership. Meanwhile, a silent partner might only make capital investments.
Since these defining roles state what a partner can and can’t do, the process will be more streamlined.
Financial Structuring
Now, you must create a structure for overall financial resources in commercial property investments. Discuss whether your partners will provide personal guarantees for loans or limit their liability. It’s also important to clarify the initial investment amount each co-investor will contribute, how additional capital needs will be handled, and the ownership percentage based on contributions and responsibilities.
Decide on Profit Distribution
When you make a huge capital investment, you expect to make a maximum return, and your partners think about this, too. So, it is ideal for all the partners to come up with a financial structure that outlines how profits and risks are shared among everyone.
In an equity-based sharing arrangement, both profit and loss are shared based on the proportion of investment each partner makes. Some partnerships offer Preferred Returns, where the investors receive a fixed return on capital before the splitting of additional profits. Similarly, some investors may focus on distributions based on net operating income or cash flow.
Create a Partnership Contract
When entering into a partnership that requires a huge capital investment and risk, it is always a good idea to initiate legal and regulatory considerations. There are many places where things could go wrong, so it is better to be safe than sorry.
A Partnership Agreement is a legal contract that outlines investment contributions, decision-making guidelines, profit distribution, and exit mechanisms. It makes each partner conscious of his or her obligations and rights.
Consider Legal and Tax Implications
Taxation obligations must be considered beforehand because profit, loss, and capital gains are differently taxed based on the nature of the partnership arrangement adopted. You also need to adhere to local laws, such as property legislation and zoning ordinances, to avoid legal complications.
Exit Strategies and Dispute Resolution
Lastly, you must consider exit strategies and dispute resolution, as changes might go wrong when many people are involved.
You can do this in many ways. First, a Buy-Sell Agreement sets predetermined terms by which a partner can purchase the share of another when both parties agree. Likewise, the Right of FirstRefusal (ROFR) clause ensures existing partners the right of first refusal to acquire the interest of an exiting partner before offering it to a third-party investor.
Mediation and Arbitration can be included to form conflict resolution processes that don’t include costly legal conflicts. Also, Dissolution Terms define the conditions under which the partnership must or may be terminated, such as unanimous agreement, financial insolvency, or expiration of a fixed term.
All in all, a commercial property investment partnership must be established with proper care, legal accuracy, and financial wisdom. If you are considering one, advice from experienced real estate businesses, financial advisors, and legal experts can establish the firm foundation necessary for success.Contact experts to get professional advice and tailored solutions in Melbourne’s commercial property sector.