Expert: Phil Nicols - 3/1/2008

Question
I just negotiated a deal for a package of 3 separate medical office buildings for investment purposes price about 7.5 million (3.3 plus 2.1 plus 2.1). Location Michigan. I have a friend who is part of this on 50/50 basis. I am looking for advice how best to structure this legally. Should we have a separate LLC for each building or one LLC for all or some other structure ? Should we both own all 3 buildings jointly or just own the bigger one jointly since 2 smaller building are similar in size and cost ?

any other suggestions ?
Thank you

with regards

anil

Answer
Anil

congrats on your deal.

Im in Ontario Canada and cannot give specific advise for Michigan. Im sure you know the best lawyers and accountants in Michigan. Thats who you need.

All the buildings should be owned by a company of which you are shareholders (equal in this case cause you both own 50%)

this way, if you want to sell, you can sell your shares, not interest in 1.5 buildings for eg (which is a harder sell).

2nd, this is a partnership like any other and in that partnership the most important thing to look at is a way out.

you need to have "escape plan" in place -- a "formula" for figuring out what the shares are worth at the time of the sale -- ideally this if negotiated BEFORE you buy otherwise you get into he thinks his shares are worth X and you think they are worth Y

the escape plan needs to address things like, what if your partner is not willing to buy you out? or cannot for other reasons?

what if one party wants to refinance and the other doesn't?

who gets final say on acceptance of a tenant?

what if you have vacancies? whos responsible for the costs involved in carrying the property (50/50 in this case) and who gets the final say on things like how much money you are swilling to pour back into the property for things like re-leasing, maintinance -- and what is a maintainace cost vs what is a capital expense?

eg, maybe the HVAC system on one building needs 10,000.00 to "fix it" but it cost 18,000 to "replace" it. are you going to argue whether to replace it or repair it? and even if its replaced, is that maintenance  or is that a capital expense?

you really need a good core team to deal with properties like this. you need a "commercial real estate lawyer" - not a family law lawyer etc - you need a specialist and one with experience in YOUR STATE to set up the share holder agreement and you also need a good accountant as well as a tax lawyer. the team needs to work together to create the most advantageous shareholder agreement as well as benefiting tax laws in your state.

-- even if it doesn't, assume every deal you do "will" go to court.

best, Phil