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Appropriate Settlement for JV Partner Backing Out of Partnership

reinvestors88

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Our JV partner indicated an intention to back out of partnership, and being the first, we are wondering what's the best settlement - seed money in the JV + 5%, 10%, etc? Though based on JV agreement, settlement would be based on net share (after considering share from refinancing, cash flows, profits/losses from operations and net proceeds of sale, when property is sold), we would like our partner be happy with the return of his investment with us. What would you do in your case?



Thank you in advance for sharing your thoughts and experiences in this matter.
 

Thomas Beyer

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Deduct any and all fees that you would incur as if you sold this asset: realtor fees, capital gains taxes (if held in a corporation), legal fees and especially: mortgage discharge penalty. As a result the investor may get less than her/his original investment back, depending on the details.



You can always agree to pay more than that, but at the very least you should create a spreadsheet showing all these costs. Real estate is a high transaction cost business where a sale prior to a 5 year mortgage renewal may lead to losses or only very small gains due to these aforementioned fees.



A JV is a partnership that has to be win/win for both parties. As such, be fair, but not too generous. A -10% loss, a 10% gain or a break even might be fair here.
 

reinvestors88

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[quote user=ThomasBeyer]A JV is a partnership that has to be win/win for both parties. As such, be fair, but not too generous. A -10% loss, a 10% gain or a break even might be fair here.


As you mentioned, we had prepared a spreadsheet showing calculation of net investment due to him after deducting all costs, if property is sold - realtor's commission, legal fees, and will include mortgage discharged penalty which we missed to consider (thanks for that).



Then, we plan to present the spreadsheet and compare his net investment versus our settlement offer - not too generous but just a fair one, and we'll see from there. Hope it works well.



Again, thank you very much Thomas for sharing your expert advice.
 

Thomas Beyer

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Mortgage penalties can be significant .. 3 months interest minimum and often the difference to bank's rack rate to maturity. So on a $300,000 loan at 3% due in 3 years using the 4.5% rack rate that would be 3 years x 1.5% times $300,000 = $13,500
 

reinvestors88

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Wow, that's huge! We'll definitely check on that with the lender and include in the calculation.



Thanks a lot Thomas.
 
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