Much press has been given to the divorce of Jeff and MacKenzie Bezos’ estimated $140 billion divorce. How their fortune and assets will be divided has become public fodder. The couple did not have a prenuptial agreement and Amazon was created after they were married. Therefore, they created the company together and likely all assets will be divided equally. The reason their interests will be equal is because they were married throughout the time that Amazon was created and Washington is a community property state, so all assets are presumed to be assets of the community. However, what if that weren’t the case? What if they had lived together for 25 years, but never married and only MacKenzie Bezos’ name was listed as the owner of the stock of the company? Does this sound like a lot of real estate transactions you may have done?
It is often normal for an investor and financier to get connected to work on an investment, whether a fix-and-flip or buy and hold. The financier brings the money, while the investor finds the deal and handles the operation and management. Whether it is due to laziness or because deals come too fast, these people do not properly formalize their agreement in writing.
When people get together in these types of transactions, the financier generally falls into one of two categories: a lender or a partner in the investment.
In the former, the financier is entitled to get their money back in addition to a set interest payment. In the latter, the financier takes more risks, but expects an equal share of profits and losses. Because of these different options, it is important for the parties to set forth their agreement. If you have a lender/ borrower situation it is more common to see the financier take a promissory note and deed of trust against the property. If the borrower fails to pay the amounts owed, the financier can foreclose on the property.
Alternatively, if the financier expects to share in the profits and loses, the relationship should be governed by a joint venture agreement. This document would set forth the obligations and responsibilities of each party, how much that party will share in the profits and loses, and potential exit strategies should either party wish to terminate the agreement. For example, a good real estate joint venture agreement will set forth the parties’ intent on when they intend to dispose of an asset; however, it should also provide a procedure for either party to terminate the joint venture early should they elect to do so. This can be done through a buy-out of one property by the other, or a forced sale of the asset.
As noted above, Washington is a community property state, as is Arizona. This means that there is a presumption that anything obtained in a marriage, is owned by the community, and each party has a half-interest in that property (unless there is a prenup). However, if a couple lives together but never gets married, they are more akin to joint venture partners without a written agreement. Unlike in marriages, there is no default in the law when it comes to joint venture agreements. When this occurs, the court is left to determine the rights of the parties and it always leads to messy litigation – whether it is a couple living together or an investor and financier doing a deal together. It is possible that the parties are equal partners, but it is also possible that the financier gets preference on their money or that the profits aren’t shared equally. Because of this, when entering real estate transactions, it is important that the partners set forth their intent in writing. There is no specific form that must be used, but the parties must set out what their intent is with the project, who is providing what services, how the asset will be sold or held, and how profits and loses will be split. This will save thousands of dollars down the road.
By Mark B. Zinman, Zona Law Group