Big business has made headlines in recent years for playing a role in solving community, national and global problems. Sometimes the corporations’ role is for social change. Sometimes, it is for humanitarian assistance. And, sometimes, it is to fill in the gaps where the government has fallen short.

There have been many instances of corporate involvement in all of these aspects over the last few years. 2 have recently caught my eye that are a bit out of the ordinary. The first, the Seattle City Council passed an ordinance levying a tax on large businesses in the amount of $275 per full time worker per year. The tax would be used to combat Seattle’s growing homeless problem. After pressure from 2 of Seattle’s largest employers, Amazon and Starbucks, as well of most of the Seattle business community, the Council repealed the tax just 1 month later. The opposition was to the “tax on jobs”. No one argued against the need to solve the homeless problem. Amazon and other companies shared concern about the problem and have contributed to programs on a charitable basis. Whether forced contribution to government programs to the effort is the answer was not the issue.

The other instance that caught my eye is Domino’s recent initiative to repair America’s infrastructure. The pizza chain announced last week that it would partner with American towns and cities to fix potholes. Initially, Domino’s has partnered with Bartonville, Texas, Milford, Delaware, Athens, Georgia and Burbank, California. Paved over potholes are then painted with the Domino’s logo and catch phrase, “Oh Yes We Did”. Is Domino’s solving a need that local governments can’t fund?

These are 2 new and unique approaches to long term corporate involvement in community issues. Historically, even recently, corporate involvement has been less direct, even when requested. It may have been in the form of influence. Calls for consumers for boycotts of companies that under pay employees, harm the environment or take unpopular stands politically have been going on for decades. Corporate boycotts could force companies to change policy or even pressure government officials by way of campaign donations or other methods. The corporate boycott works today as we have seen gun control advocates call for boycotts of advertisers of Fox News shows.

Along this same line of thought, corporations took a big stand to change policy following the Parkland shooting earlier this year when Dicks Sporting Goods stopped selling fire arms and Walmart changed its policies regarding fire arms and ammunition sales. These companies hope to send a message to customers and elected officials that new laws and regulations are necessary.

Robert Iger CEO of Disney and Elon Musk CEO of Tesla both resigned from presidential advisory commissions following President Trump’s withdrawal from the Paris Climate Accord, bringing the weight of their companies behind their objections to the new US climate policy. Could this corporate pressure have an effect on the policy? So far, it hasn’t. But, it could in the long term.

In Fort Lauderdale, about 25 years ago, Wayne Huizenga, then the owner and CEO of Blockbuster Video, recognized the city’s own homeless problem which the city had failed to combat. He organized the business community in Broward County to raise money to fund a homeless shelter in partnership with the County. This was the model of corporate involvement. It was charitable giving. Gather your friends, raise money and when possible, involve local government.

Things have changed. Maybe Seattle’s effort to tax business was not the best approach. But the target was correct. Corporations will get involved to help solve problems, clearly if there is something in return to them. Profit is one thing, publicity is another. Being a good corporate citizen is on the list, but that is likely far down the list. Corporate resources, financial and otherwise, far exceed governmental resources. For most necessary projects, government leaders should look to form Public Private Partnerships (PPPs) with local business to solve the problems the community faces. PPPs are successful in real estate developments and economic development and could be beneficial in this realm as well.

As for Domino’s and the pothole problem? Is it publicity stunt? Perhaps. But it is solving a problem in 4 cities. Maybe, down the road, more cities will be involved. This could be the 1st PPPPP (Public Private Pizza Pothole Partnership) ever seen!

Forming a business entity with partners for real estate or other purposes requires careful thought. There are many factors to consider. We have written about some of the important considerations before (see prior posts HERE and HERE). One consideration that deserves particular attention is the exit strategy if the business doesn’t go as planned or, more specifically, if one partner doesn’t perform as expected. This is extremely important for the money partner where the minority or sweat partner is given equity up front without making a cash contribution or with only a small cash contribution or has options to acquire equity for little to no investment other than “sweat”.

Two years ago, I drafted such an Operating Agreement for a client. My client, the money partner, who would also be taking an active role in the company. The client was funding 100% of the initial cash needs of the company. As such, he would receive 99% of the membership interests in the newly formed LLC. The minority partner was to provide only sweat for a 1% stake. We treated the client’s investment as a loan. The minority partner had an option to receive up to 49% of the interest in the company if he made a $100,000 contribution to the company in the first 2 years. That contribution would be used to pay down the client’s loan. Upon making the contribution, the client would immediately transfer 10% of his shares to the minority partner. If the partner did not make the contribution on time, the option to acquire a larger share of the company was reduced to 30% and either way, transfers of membership interests to the minority shareholder would occur going forward only when the company was able to generate sufficient revenue to pay down the debt owed to the client. Transfers would occur at certain benchmarks.

The partner did not make the capital contribution and the company was unable to generate revenue so the loan was not repaid at all. Instead, the client made additional loans to the company. The client recently decided that he wanted a way to change the deal. Fortunately, we planned for that.   We added provision to the Operating Agreement allowing the client, as the manager, to terminate the minority partner’s employment with the company without cause. Upon such termination, the company was obligated to buyout the partner at an agreed price of 150% of the value of the partner’s interest in the company. The company value would be determined by the company’s accountant.

This provision is very clear and the partner had a decision to make. He either had to renegotiate the option provision, which the client felt was necessary in order to attract new investors to the company. Or, the partner could allow the termination provision to kick in. That would, in effect force the partner to pay his share of the company debt to the client because the company debt is currently greater than its assets.

Planning for the worst can help to avoid protracted disagreements. While the partner, in this case, was initially uncooperative, after further thought and conversation, the parties did, in fact, come to a satisfactory conclusion. The client’s position was protected and he will be able to attract new investors to the company in the future and hopefully, grow the company and recover his investment.

Forming an entity to purchase, develop and operate real estate is generally a good idea for many reasons. There are tax considerations and liability implications that should always be at the forefront of any discussion when investing in real estate.  These are primary questions whether there are multiple partners or only a single investor involved in the deal.  But, when there will be more than 1 partner in a project, some sort of entity will need to be formed, whether a corporation, general or limited partnership, or a limited liability company or similar limited liability entity.  The “partners” (I am using this term generically to cover all  possible entities) should enter into an agreement carefully to set forth the rights and obligations of each partner so that there are not any questions about what happens in the future if/when certain problems arise.

Every relationship starts out with the best of intentions. Friends and family members, even acquaintances, generally trust each other to do the right thing.  But when money is involved or deals turn side ways, all bets are off.  Here are 6 provisions that should be considered in every shareholders, partnership or operating agreement, particularly when real estate is involved:

  1. Management Authority and Major Decisions – going into a real estate deal, 1 or 2 people might be the sponsors, or, 1 partner might have certain expertise and another might have a different expertise. Very likely, 1 partner might be the real estate guy and the other or others might be providing the capital.  It is important to determine who will make the day to day decisions and what decisions constitute “major decisions” requiring a vote of the partners.  Will  major decisions require a majority vote or a super majority?  Perhaps even a unanimous vote?

 

  1. Admission of New Partners – it is important to determine whether there will be spelled out criteria for admission of new partners and whether a vote of the partners is required to admit new partner or if the managing partner may admit new partners on his/her own. More importantly, will the admission of new partners dilute the voting interest or equity interest of the existing partners?

 

  1. Transfer of Ownership Interests – there are 2 concerns here, voluntary transfers and involuntary transfers. A voluntary transfer is the ability of a partner to freely transfer or sell his/her interest to 3rd parties.  Should this be permitted?  Or, should voluntary transfers be tightly controlled or absolutely restricted?  Involuntary transfers include transfers due to bankruptcy, divorce and death or a partner.  These are of concern to the partners because often, the non-transferring partners don’t want to be partners with the ex-spouse or surviving spouse, or be forced to deal with the bankruptcy trustee.  Therefore, it is important to provide mechanism for dealing with involuntary transfers.

 

  1. Capital Calls – the partners must determine the procedures for dealing with the need for additional capital and what happens when a partner does not fund.

 

  1. Buy/Sell Provisions – often, partners want to add provisions allowing for a partner to buy out the other partners. Sometimes, these mechanisms allow for “put and call”, requiring a potentially purchasing partner to sell his interest instead so that the financially stronger partner can’t force out the weaker partner any time he/she desires.  These provisions also can include rights of first refusal.

 

  1. Exit Strategy and Other Obligations – what is the partnership’s overall exit strategy? Have the partners agreed to sell the property at a fixed benchmark such as the exercise of a purchase option by a major tenant? What about other obligations like loan guaranties?  Are any of the partners obligated to provide guaranties for financing for the project?  These kind of provisions must be included in the partnership agreement.

 

These 6 provisions might only scratch the surface of issues relative to real estate deals. Every partnership and real estate transaction is unique.  If there are deal specific provisions, they should be added to the partnership agreement so that no questions or expectations are left unanswered.

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