Last Updated on March 18, 2024 by Jawad Ali
Sponsors of commercial real estate transactions private equity firms, REITs, or individuals – raise equity from investors to close the deal.
The equity is usually contributed by multiple investors, each contributing a certain amount. Tracking how much each investor contributed, how much is due, and how much has been earned can be difficult for a sponsor.
Managing multiple deals at once is especially challenging. Sometimes, funds must be commingled.
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Commingling in real estate
Commingling is a term for mixing money or funds from multiple sources into one fund or account. Real estate investors use this term to describe the practice of using their own persona money and client funds, and company assets in one combined pool that they manage and invest together, added Jeremy Millul, who minored in real estate. In 2015, he founded his own company – Jeremy Millul Inc. And remains the President. His innate knowledge of product development, negotiating with suppliers, and marketing for product-based businesses has helped him build businesses with multi-million-dollar annual revenues.
What are the benefits of investing in real estate with commingled funds?
The number one benefit of investing in real estate with commingled funds is convenience; it allows you to avoid making separate transactions and bank accounts to manage each funding source. Investing with other people’s money can also be more efficient than managing your due diligence process, as you will have access to cash at all times without always having to wait constantly for individual investors to fund their share.
What are the possible drawbacks of investing in real estate with commingled funds?
There can be many drawbacks to commingling your money, including lack of control over how clients might use your money or limited ability to take legal action if there is a mishap involving the commingled account. Commingling has become popular due to its convenience and efficiency; however, there is no substitute for proper self-governance when managing client money.
If you invest in real estate with other people’s funds, keep complete records and carefully separate transactions by type so that you can manage each source of funding independently. There are numerous risks involved with this investment, so ensure that you take the necessary precautions.
Consequences of commingling funds in a real estate transaction
The consequences for commingled funds in a real estate transaction can be severe. If you do not adequately separate transactions, it can result in all your business and personal assets being seized. This is especially dangerous with real estate investments because you could lose your home even if you invest in property that fails to appreciate or produce profits. You should never mix money from multiple sources into one account unless you understand the risks involved and have taken proper precautions to protect yourself from potential loss.
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Commingling funds in your investment
Another thing to consider when investing is how much risk you will take by mixing client money with company money. If you manage funds belonging to several different people, this could also create a conflict of interest. For example, suppose your boss gives you $200,000 to invest and directs that it be placed in a property he owns personally. In that case, there is the risk that you will take on more debt than needed because you do not want to undermine his investment or offend him by suggesting that he use another source for funding.
Commingling funds’ money
Commingling occurs when funds from multiple investors are mixed into one account for investing purposes. This process allows investors to pool their money together and avoid having separate transactions and accounts for each investor involved in a real estate project or other investment venture. While there can be many benefits to commingling funds, such as efficiency and convenience, it can also be a dangerous practice that could result in the seizure of all your business and personal assets if you do not adequately manage individual transactions.
Business commingling
Business commingling is when a company takes money from one or more individuals who have provided that cash for the use of the business itself. The money may come from several different sources: wages paid in advance to employees waiting for payday, a deposit made by a customer or client, or the business partners themselves may even contribute it. Anyone or more of these contributions has been held by courts across the country to constitute legally permissible commingling.
Agreement and contribution
This broad acceptance of commingled accounts has been tested, however. In one case that went to the U.S. Supreme Court, a group of wealthy Utah businessmen had provided over $2 million in cash and property to a limited partnership for use in a venture to develop real estate. The partnership agreement specified that the contributions were limited and could not be withdrawn by the contributors as long as there was an outstanding liability on the partnership; they were simply equity partners waiting for their returns.
Even though these contributions constituted about 95 percent of the capital used in developing real property when the property was sold two years later (at a net loss), no attempt was made by those who contributed it to collect this money back from the sale proceeds; instead allowed it to go into general accounts. All of the funds in these accounts, including the partners’ contributions, were claimed by creditors of one or more partners who had suffered personal financial setbacks. This went against all prior precedents allowing commingling.
When the case reached in the supreme court
But when this case reached the Supreme Court, it was decided that commingled accounts are legal and do not violate any rights of partners to withdraw their initial contributions. The Court said that there must be an “express agreement” between the parties involved that prohibits withdrawal; business commingling does not violate any implied agreement between partners (McCauley v. Lucas).
This went against all prior precedents allowing commingling.
Although this has been a common practice among entrepreneurs seeking capital for new enterprises for many years, some caution should still be exercised before commingling business and personal funds. Anyone commingling business and personal accounts should make sure to provide notice of their intent, as it is almost always a good idea to protect one’s interests in the best way possible.
