From Luke Johnson’s column in the Financial Times, “Time of Trial Brings Out Our Litigious Side”:
The truly vicious [lawsuits] are those where professional partners have a dispute…Falling out can arise through envy, through desperation, through honour, and a feeling that some are not pulling their weight. Writs are being served all over the place for non-payment of debts, warranty claims over failed acquisitions, unfair dismissal and who knows what. The air is thick with recriminations and resentment, as the Great Recession leaves lots of people broke, unemployed or looking stupid and out for revenge.
Partnerships in various forms (general partnerships, limited partnerships, limited liability companies, tenancy in common) are very common ownership structures in commercial real estate. Sometimes they represent equals pooling resources to acquire and operate properties larger than the individual partners could acquire on their own. More often, the partners bring different things to the table; for example, investors with money but without a lot of real estate expertise invest funds with a general partner that has expertise but not a lot of money.
This all works well until it doesn’t. When a property severely underperforms, few partnerships survive. If additional cash is required, the money investors often balk or expect the general partner to contribute an equal amount or step aside. Even if contributing additional cash to save the investment makes sense, too often partnership differences prevent an economically rational solution.
Lenders often depend on the financial strength of the investor partners, and don’t realize that more often than not the money partners will not support a deal when they’ve lost confidence in the general partner. The greater the number of partners, the greater the difficulty. The sad story of DBSI (see this link) is an extreme case which is being repeated on a smaller scale on a daily basis.
The safest ownership structure is a single experienced, financially strong operator. If you can’t have that, a partnership of equals is your best bet. Partners with unequal resources are their own source of trouble when the going gets tough.
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