How do you structure a fair and effective partnership agreement for your real estate development project?

1 Types of partners

One of the first steps in creating a partnership agreement is to identify the types of partners that will participate in the project, and their respective roles and contributions. Generally, there are two main types of partners in a real estate development project: general partners (GPs) and limited partners (LPs). GPs are the ones who manage, control, and execute the project, while LPs are the ones who provide capital, but have limited involvement and liability. Depending on the size and complexity of the project, there may be multiple GPs and LPs, or even subcategories of partners, such as managing partners, development partners, equity partners, debt partners, etc. The partnership agreement should clearly define the types of partners, their roles, responsibilities, and authority, as well as their ownership and voting rights.

2 Capital structure

Another important element of a partnership agreement is the capital structure, which determines how the project will be financed, and how the profits and losses will be allocated among the partners. The capital structure typically consists of two components: equity and debt. Equity is the money that the partners invest in the project, either as cash or as in-kind contributions, such as land, services, or expertise. Debt is the money that the partners borrow from external sources, such as banks, lenders, or investors. The partnership agreement should specify the amount and proportion of equity and debt that each partner will provide or secure, as well as the terms and conditions of repayment, interest, and collateral. The partnership agreement should also establish how the profits and losses will be distributed among the partners, based on their equity contributions, preferred returns, profit splits, and waterfall structures.

3 Decision making

A third key element of a partnership agreement is the decision making process, which defines how the partners will communicate, coordinate, and resolve issues related to the project. The decision making process should outline the frequency and format of meetings, reports, and updates, as well as the quorum and voting requirements for different types of decisions, such as strategic, operational, financial, or legal. The partnership agreement should also include provisions for dispute resolution, such as mediation, arbitration, or litigation, in case the partners cannot reach a consensus or agreement on any matter. Additionally, the partnership agreement should address the scenarios and procedures for adding or removing partners, transferring or selling interests, or dissolving or terminating the partnership.

4 Risk management

A fourth essential element of a partnership agreement is the risk management strategy, which identifies and mitigates the potential risks and uncertainties that may affect the project. The risk management strategy should cover the internal and external factors that may impact the project's feasibility, profitability, and legality, such as market conditions, regulatory changes, environmental issues, design flaws, construction delays, cost overruns, or lawsuits. The partnership agreement should specify the roles and responsibilities of each partner for managing and monitoring the risks, as well as the contingency plans and reserves for dealing with unexpected events or outcomes. The partnership agreement should also define the rights and obligations of each partner in case of default, breach, or force majeure, such as remedies, indemnities, or warranties.

5 Exit strategy

A fifth and final element of a partnership agreement is the exit strategy, which determines how the partners will exit the project and realize their returns. The exit strategy should reflect the goals and expectations of each partner, as well as the market conditions and opportunities. The exit strategy may involve selling, leasing, or refinancing the property, or holding it for a longer term. The partnership agreement should specify the timing and criteria for exiting the project, as well as the valuation and distribution methods for the property or the partnership interests. The partnership agreement should also address the tax implications and legal formalities of exiting the project, such as capital gains, depreciation, or dissolution documents.

6 Here’s what else to consider

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