What to Consider When You and Your Partners Go Separate Ways
Last week, we began a multi-part series on the importance of exit planning for co-owned commercial real estate. This applies to both owner-user industrial properties, where business partners buy a building for their company, and investor-owned assets where multiple parties pool capital to acquire income-producing real estate.
As industrial property values remain historically high despite a slower market, planning ahead has become more important than ever.
Why Co-Owned Properties Require Special Planning
Most commercial properties acquired by multiple, non-family investors are held in a Limited Liability Company (LLC). The LLC clearly defines ownership interests, management authority, and decision-making responsibilities.
While most LLCs are structurally similar, each should be customized to address the long-term goals of the members, especially the rules governing a future sale or exchange. This is a recurring issue we see when discussing commercial real estate exit planning for partners, where acquisition terms were well thought out but disposition planning was deferred.
Why Disposition Planning Is Often Overlooked
At the time of acquisition, partners are focused on closing the deal not on what might happen decades later. Health issues, estate matters, retirement timelines, and diverging financial goals are rarely top of mind.
Unfortunately, these life events are exactly what force difficult disposition decisions later. This challenge often surfaces when owners begin evaluating disposition strategies for co-owned industrial real estate and realize their structure limits flexibility.
The Drop & Swap Strategy Revisited
In Part 1 of this series, we introduced the Drop & Swap concept. This strategy allows an LLC to transfer ownership into a Tenancy in Common (TIC) structure, giving individual members the ability to choose separate exit paths.
Without TIC vesting:
- The LLC must act as a single entity
- All members must agree to exchange or sell
- One member’s need to cash out can force a taxable sale for everyone
This becomes especially problematic when properties are highly appreciated and ownership spans decades. The Drop & Swap is frequently used alongside 1031 exchange strategies for industrial property owners who want flexibility at disposition.
A Real-World Scenario: When Planning Makes All the Difference
To illustrate how proactive planning works, consider the following hypothetical based on situations we routinely see.
Three longtime friends pooled resources in the 1990s to buy a 12,000-square-foot industrial building in Anaheim for $65 per square foot. Over time, their business thrived, and the property appreciated dramatically.
As life evolved:
- One partner planned to retire and pass the business to his child
- One partner passed away, leaving his interest to his spouse
- One partner continued expanding his real estate portfolio
Recognizing that their paths would eventually diverge, the partners converted the LLC ownership to Tenancy in Common well before any sale occurred. This kind of foresight is central to effective industrial real estate exitplanning.
The Outcome: Flexibility Without Tax Consequences
When the building was sold years later:
- The deceased partner’s spouse received cash with a full step-up in basis, avoiding capital gains taxes
- One partner completed a 1031 exchange into a future retirement home, following Safe Harbor rules
- The other was exchanged into a multi-family property better aligned with his portfolio goals
Meanwhile, the operating business relocated into a smaller industrial space, taking advantage of a softer leasing market.
All parties achieved their goals without conflict, forced sales, or unnecessary taxes.
The Bigger Lesson for Co-Owners
This scenario highlights a simple truth:
Good planning protects everyone. Poor planning hurts everyone.
Ownership structures that work well during acquisition can become major obstacles during disposition. Knowing the rules and preparing early allows partners to move in different directions without damaging relationships or financial outcomes.
Own Industrial Property With Partners? Now Is the Time to Review Your Exit Plan.
If you co-own industrial or commercial real estate and haven’t reviewed how your ownership structure affects future sale or exchange options, a proactive conversation can save significant time, money, and stress later.
👉 Talk to a Zehner Hill industrial real estate advisor