Partnership question - Posted by Richard Donnington

Real Estate Investing Real Estate Law
1

Posted by Jimmy on February 14, 2007 at 07:18:37:

this was a very predictable issue, if you thought about how the deal work for even 5 minutes…

do I have this straight? you put down a 30% dp. she put in no cash. she got mortgage in her name only? you have no personal liability on mortgage. [by the way, how is property titled?][and how did she manage to get 70% of the deal with no cash? you should have the lion’s share of this deal, and she should get the crumbs].

if I have the facts right, you are mostly correct. debt service is her baby. start with rents, subtract off an appropriate amount each month for allocated property taxes, insurance, and a reserve for repairs and maintenance. you should get 30% of that net amount.

it is COMPLETELY unfair that she got a free ride on your downpayment, took a grossly disproportionate share of the deal, and now wants a free ride to pay her mortgage.

2

Partnership question - Posted by Richard Donnington

Posted by Richard Donnington on February 13, 2007 at 22:56:36:

This is actually a short, simple question so bear with me.
I only seek general thoughts, not legal opinion.

Scenario: I entered into a partnership with a friend to buy a property. I provided cash down-payment, she got the mortgage. I have around 30% equity, she has around 70%, according to our basic agreement. Once the property was rented, she starts paying the mortgage from the rental cash flow. She thinks this is the right way to pay down the debt and build her equity.

Question:
I think that she should distribute 30% of the rental income to me before she pays the mortgage, since I believe that the mortgage payment represents her equity.

She thinks we should pay the mortgage first because (in her view) this is an operating cost. She wants to either 1) make no distribution of rental income or 2) make distribution after we pay the mortgage.

Generally speaking, which of our two positions is the way you would expect to run a partnership of this sort?

Our agreement is fairly simple and does not in any way address the distribution of rental income, so we’re in uncharted territory here.

Thanks for your general thoughts on this question.

Richard

3

Re: Partnership question - Posted by John K Haslach, CPA, MST

Posted by John K Haslach, CPA, MST on February 17, 2007 at 12:14:23:

You can have a wide range of allocations, but, for tax purposes, the IRS does not have to accept them and can reallocate income, expense, gain and loss. You should really work with a professional who is comfortable in the area.

4

Re: Partnership question - Posted by Frank Chin

Posted by Frank Chin on February 15, 2007 at 11:29:55:

Richard:

Speaking of partnerships, for RE, there are several elements, each of which has to be spelled out, which does not have to be in proportion to the down payment made, and they are:

  • Equity interest of each, which you say is 30/70
  • Appreciation, capital gains distribution on sale
  • Depreciation (is it going to be 30/70)??
  • Profit or loss distribution.
  • Who does what??

They can all be in different proportions, though I recall none of which can be less than 1%.

Being a RE investor, I always look at interest expense as part of the cost, though not principal amortization. If you were talking to me, I’d say “Rich, of course interest is part of the cost, why isn’t it”??

And if you want to count everything before the interest, are you going to be responsible for 30% of the interest afterwards??

It is difficult to gauge why you only have 30% equity putting in the whole down payment, unless you cannot get a mortgage otherwise.

And you said “she got the mortgage”, so isn’t your name on the mortgage too, as banks require everyone on the deed on the mortgage??

But if she’s only on the mortgage, not you, something goes wrong, she’s on the hook. Taking on all the risk is worth something also.

Seems like there was a big ommission here.

Frank Chin

5

Re: Partnership question - Posted by Tom Delaney

Posted by Tom Delaney on February 14, 2007 at 09:39:54:

Good thing you didn’t bother with professional advice BEFORE you got into this!