When business partners can’t agree on the future of their apartment building investment, dissolution and sale may be the only path forward. Whether due to disagreements over management, differing investment timelines, or personal conflicts, partnership breakups require careful handling.
A partnership dissolution involving an apartment building requires careful navigation of both real estate and business law. When partners can’t agree, understanding your options is essential for protecting your investment.
Common Reasons for Partnership Dissolution in Apartment Building Ownership
- Different investment horizons: One partner wants to sell and cash out; the other wants to hold long-term
- Management disagreements: Conflicts over capital improvements, rent increases, or property management
- Financial stress: One partner needs liquidity due to personal circumstances
- Death or incapacity: A partner passes away, and heirs want out
- Business disputes: Broader conflicts that make continued partnership untenable
Options When Partners Disagree
1. Negotiated Buyout
The cleanest solution: one partner buys out the other at an agreed-upon price. This requires:
- Agreement on property value
- Sufficient capital or financing for the buying partner
- Willingness to negotiate terms
2. Agreed Sale to Third Party
Partners agree to list the property and split proceeds according to ownership percentages. This works when both parties accept that selling is the best outcome.
3. Partition Action (Court-Ordered Sale)
When partners can’t agree, either party can file a partition action asking the court to force a sale. This is expensive, time-consuming, and typically results in a below-market sale—but sometimes it’s the only option.
4. Mediation or Arbitration
A neutral third party helps partners reach agreement without litigation. Many partnership agreements require mediation before court action.
The Valuation Dispute
Partners often disagree on what the property is worth. Common approaches to resolve this:
Single Appraiser
Both parties agree on one appraiser whose opinion is binding.
Dual Appraisals
Each partner hires an appraiser. If values differ significantly, a third appraiser breaks the tie or values are averaged.
Broker Opinion + Market Test
Get a broker’s opinion, then list the property. The market determines actual value through buyer offers.
What Your Partnership Agreement Says
Well-drafted partnership agreements address dissolution scenarios:
- Right of First Refusal: Existing partners can match any outside offer
- Buy-Sell Provisions: Predetermined formulas or processes for buyouts
- Drag-Along Rights: Majority partners can force minority partners to sell
- Tag-Along Rights: Minority partners can join in any sale
- Dispute Resolution: Required mediation or arbitration before litigation
Review your operating agreement or partnership agreement before taking action.
Tax Implications of Partnership Sales
Pass-Through Taxation
In most partnerships (LLCs taxed as partnerships), gains pass through to individual partners based on ownership percentage. Each partner reports their share on personal taxes.
1031 Exchange Considerations
Individual partners can potentially do 1031 exchanges with their share of proceeds, but this requires advance planning. The partnership itself can also do an exchange if all partners agree.
Installment Sales
If one partner buys out another over time, the selling partner may be able to spread tax liability through installment sale treatment.
The Partition Action Process
If negotiation fails, partition is the legal remedy. Here’s what to expect:
- Filing: One partner files a partition complaint in Superior Court
- Response: Other partners respond, potentially contesting or negotiating
- Referee Appointment: Court appoints a referee to oversee the sale
- Property Sale: Referee lists and sells the property, often at auction or through a broker
- Distribution: Proceeds distributed according to ownership after costs and fees
Partition actions typically take 6-18 months and involve significant legal fees. The property often sells below market value due to the forced-sale nature. Negotiated solutions are almost always better for all parties.
My Role in Partnership Dissolutions
I’ve helped numerous partners navigate difficult situations. My approach:
- Neutral valuation: Provide an objective broker opinion of value that both parties can rely on
- Equal communication: Keep all partners equally informed throughout the process
- Professional marketing: Maximize sale price regardless of partnership dynamics
- Confidentiality: The market doesn’t need to know about partner disputes
If you’re facing a partnership dissolution involving an LA apartment building, request a confidential consultation. I can provide a valuation and discuss options for moving forward.
Partnership dissolution doesn’t have to be adversarial. Partnership dissolution for an apartment building doesn’t have to be adversarial. With the right approach and professional guidance, partners can achieve fair outcomes and move on to their next investments.