The holiday season is supposed to be a joyful time. Beginning at the start of November, as thoughts turn towards Thanksgiving turkey, cooler temperatures, family gatherings, Christmas, Chanukah, New Years and shopping, a certain contentment begins to settle in all around.  Or does it?

Certainly not in offices where real estate closings take place. Holiday season brings panic.  As year end approaches, the calendar is the enemy.  Everybody wants to close and everything is a rush.  A feeding frenzy has begun.

Why does this happen? I remember when I first began practicing, we always had to get 1 or 2 last big deals finished before the end of the year.  My senior partners always told me we had to do this for “tax reasons”.  The first couple of years, I assumed that this was because the client had tax planning reasons for closing by December 31.  I then came to realize that it was really for the firm’s cash flow needs that December 31 was critical.  Close the deals, collect large fees, partners get bonuses, don’t close, no fee, partners don’t get bonus.  Simple economics!

Later, when I started practicing on my own and money in the bank on 12/31 vs. 1/1 made no difference to me, we still had surges in November and December. But, if deals weren’t closed by the middle of December, many clients began to close up shop for the holidays, deciding to carry over the gain or loss until the next tax year.  Thus, 12/31 became an artificial deadline.  Sometime before 12/20 was the new deadline only for my own peace of mind.

Today, the feeding frenzy is as real as ever. It is true for residential and commercial closings.  Some of it might have to do with Trump tax reform.  But there are other factors.  First, we continue to ride a long, strong economy.  The real estate market remains strong and interest rates remain low.  With so many deals out there, clients want to close quickly to take advantage of the economic climate and interest rates before this changes.

Second, contracts signed early in the year, after everything closed at year end, run their course and have year end closing dates. There are 2 factors driving this.   Commercial deals are longer term.  Once the due diligence period has run its course and approval and other contingencies have been satisfied, closing must occur.  In a typical commercial contract, this can take 6-12 months, sometimes longer.  But when the date comes up, there is a rush to close.  Though you can’t predict when a contract will be signed, it does seem that many projects start at the beginning of the year which often times out the closing date for the end of the year.  As to residential contracts, many people put their homes up for sale in the summer, after the school year.  Consequently, contracts are often signed at the end of summer and early fall.  Closings usually take 60-90 days, which puts the closing right in the middle of the holiday period.

Third, cash deals are very common in both residential and small commercial contracts. Take a lender out of the picture and the process to close gets shorter.  Sellers like to accept cash contracts as it takes a major contingency out of the picture, further shortening the closing.  Sellers will accept lower purchase prices to get to closing faster.  If the expectation is a faster closing, a closing scheduled for the holiday time period will not likely carry over to the new year.

How do we cope with the frenzy and avoid becoming shark chum? Clients, brokers and other attorneys can sense stress immediately and when they do, they do what they can to add to it.  It is important to remain organized and up to date on every transaction, no matter the size, so that you never let the sharks smell the blood in the water.  If we do this, we will make it from Thanksgiving to New Years in one piece.

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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