Partnership Disaster- How To Split? (Long)
Any thoughts on a fair solution to this problem?
Party A and Party B each own 50% of Building 1 and Building 2. They want to end their partnership by having Party A take one of the properties and Party B take the other.
Building 1 has been appraised at $375,000 and has annual gross rent of $38,000. It is a 4-plex in a less desirable part of town than Building 2. There is a $150,000 outstanding mortgage.
Building 2 has been appraised at $300,000 and has annual gross rent of $18,000. It is a duplex; one of the tenants has been there for 15 years and is paying well-below market rent (rent control). They owe $80,000 on it.
Party A's accountant evaluated the situation as follows:
Building 1: $375,000 FMV - $150,000 loan = $225,000. Each party's equity is $225,000 x 50% = $112,500.
Building 2: $300,000 FMV - $80,000 loan = $220,000. Each party's equity is $220,000 x 50% = $110,000.
The accountant proposed they do a 1031 exchange of their respective 50% interests in each building. Also, he said that whoever takes Building 1 would owe the other party about $2,500 (the difference in equity).
Party B's attorney is reviewing this proposal, but will not respond until next week.
Both sides would take either property- there's no issue there.
Does this seem like a reasonable way to split the properties? Any comments would be appreciated.
Thanks,
Tracy
[ Edited by TracyH on Date 04/29/2004 ]
Sounds most equitable. The only items are non financial figures. The headache of managing one over the other. The true costs of managing versus the other. I assume everybody agrees with the appraisal.
I hate to see you partners split up it seems you have done well.
I need a duplex in Berkeley. My daughter flushed with the enormous salery earned her first year out of school. Feels that she must go back and obtain a MBA. She is of the opinion that if she can earn this enormous sum with just a degree in Mass Comm and Anthro, my god what could she do with a Masters. My answer to her is of course. Make less money and teach.
To have her speak to me again, I am looking for a property to buy and install her in and with the income from the other half of the duplex or even triplex she can hold down her expenses in keeping with Berkeley tradition. If you see something let me know.
Lucius
Seems quite equitable to me. How come none of my partners are ever able to negotiate like this? They always seem to believe that their half is somehow better than my half.
Reminds me of the story of the investor who went partners with a farmer in a herd of cattle. Investor puts up the money, farmer has pasture and takes care of the cows they split the back end 50/50. Well there is a horrible blizzard so bad that the investor hears about it even in his office in the big city and tries to call the rancher to see how their cattle are doing. After two or three days he finally gets through. "oh, it was terrible", says the farmer "the cattle were in the high pasture and about 150 of the herd of 500 died from exposure, etc".
"Thats Awful" says the investor.
"Oh, worse than that," says the farmer. "125 of the 150 were in your half."
Anyway, all in all it seems like you have managed this fairly well.
Lucius and commercialking,
Thanks so much for wading through my lengthy post. As someone who loves to learn from those with more experience and knowledge, I truly appreciate your feedback.
This partnership has worked out well, but we've run into intractable in-law issues. All I can say is, there's nothing like money to bring out a person's true colors :o)
Lucius, congratulations on your daughter's success. There's nothing better in life than seeing your children happy and doing well. And if she's looking for a duplex in a nice part of Berkeley, she's going to need that enormous salary! :o) Everything I've seen has seriously negative cash flow. But long-term, I think Bay Area real estate is always a good bet.
commercialking, that story is too funny. Reminds me of a couple weekends back when I was babysitting my two little nieces. We had just bought ice cream cones and the older girl was carrying them over to where the younger one was anxiously waiting. A slight stumble and one cone falls to the ground; they both stare at the dropped cone in horror. Pause... gears in head turn... then the older one says reassuringly: "Don't worry Grace- we'll get you another one."
Oh, life...
Thanks again,
Tracy
Wow....a post where I agree with everything that Has been said. Just adding my sustaining vote to the post.
I do think that's a fair way to divide the deal, however, my thoughts are that a 1031 exchange on both properties might be the best (that is if both parties are interested in RE.) You could each lock in low interest rates on larger properties, and go your separate ways without "bad water" between you. What happens if you decide to split them, and one property sells for less than anticipated, or requires more work, has a roof go out 3 weeks after close, etc.
This may seem juvenile, but it worked when I was 7 years old. When splitting a piece of pie 2 ways, one person divides the pie, and the other chooses which he wants of the two. I think the same could be done here.