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Seven Critical Mistakes Real Estate LLCs Make (and How to Avoid Them) — Mistake #1: Choosing the Wrong Business Partners

This series of seven posts will capture the main points from my October 14, 2014 seminar presentation to clients and friends at the Wendel Rosen Speaker Series.  For most of my 16-year career as a litigator, I have represented many real estate developers, investors, and lenders/funds — most of which were structured as LLCs.  These “Seven Mistakes” are a survey of the courtroom battles I’ve handled frequently, and I offer some lessons on how to avoid them.

MISTAKE #1: Choosing the Wrong Business Partners

An early attorney mentor of mine had a successful litigation practice that thrived on “business divorce” work — dissolution of LLCs and other entities.  He once offered me sage advice something along the lines of, “Kevin, I can’t emphasize to my clients enough that they should approach choosing business partners about as seriously as they would approach choosing a spouse!”

He was right.

So much of the business litigation occupying court dockets is not “business vs. business,” but rather, “friendly fire.”  Stakeholder infighting and basic breakdowns in partner relationships is surprisingly common (and alarmingly costly).  Trust me, the courtroom is not the ideal forum to vet most intra-LLC power/ego struggles.  What starts as a matter of “principle” can quickly become a matter of “principal” after paying a few months of attorney invoices.

Now, don’t get me wrong.  Legitimate disputes are going to arise over the course of almost any business relationship.  And sometimes, those disputes need to be litigated.  But I’ve found that the most venomous, costly, and destabilizing disputes most often arise out of character issues that are often foreseeable, and could have been most easily avoided by never entering into the business relationship in the first place.  Many of my clients, in litigation against a business partner, will tell me that they had a “hunch” or “gut instinct” from early on that something about their partner was not trustworthy.

So the lesson here?  Scrutinize your potential business partners and listen to your instincts.  How should you do that?  Sorry, but that’s way beyond the scope of this blog.  I’m an attorney, not a psychologist or relationship coach.  But a starting point would be to follow the words of my mentor above (the business divorce attorney), and approach business relationships with a sense of sobriety and long-term focus.  And don’t let the important relationship elements (honesty, integrity, trust) get trumped by the other stuff.

 

Next post in series:

MISTAKE #2: Skimping on the Formation and Operating Documents

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