JV buy out

[angelapeng]

Greetings to REIN members,

I have a question regarding the proposal of JV buy out terms. When one partner offers to buy out the shares of another partner in a rental property, what costs are involved? I list the following estimated costs, please add on if I miss others.

-Appraisal cost
-Legal fees
-Real Estate agent fee (I wonder whether this should be included or not, because we are not selling to the general market, actually there is no agent involved in the transaction, but still shall we treat it as a sale to the market?)

Any others? Thanks!

 

[Thomas Beyer]

Treat buyout value “as if sold” so include fees you mentioned incl realtor fees and mortgage discharge penalties, too. Perhaps add even vacancy and negative cash flow for three month as selling with a tenant in it reduces value, too.


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[Cory Sperle]

It really depends on who wants out, how long into the venture, and many other factors. Yes you can estimate sales costs, and likely get close to "estimated" market value but it really comes down to your buy sell (shotgun) scenario as per your USA agreement. If you want to buy them out, offer what you think is fair and they have the option to either accept it, or buy you out at the same price.

 

[Matt Crowley]

Don't limit to just those items, say can include costs such as ..... leave it open in case additional remedies are required.

If you were the expert, you would never allow a shotgun clause. That is a clause for two equivalents, not for one expert and one amateur...

 

[angelapeng]

Hi, Thomas, Cory and Matt, thank you for your thoughts. In this particular property, I am the property manager, we have a money partner. Our JV contract will expire next year, we have discussed the possibility to sell it. From my perspective, I would like to hold it for another at least 5 years. We have owned it for 7 years now, if the money partner doesn't feel like selling, then there will be no problem. If they do want to sell, then I will buy them out.

Thomas, If I include all the other virtual costs (mortgage discharge, realtors, cleaning and vacancy costs), which could be totally around $30K, how can I justify that and present this to the partner? I guess people will accept if those costs occur, but how they can accept if not occur, just try to find a logic reasoning behind that propoal.

 

[Thomas Beyer]

Hi, Thomas, Cory and Matt, thank you for your thoughts. In this particular property, I am the property manager, we have a money partner. Our JV contract will expire next year, we have discussed the possibility to sell it. From my perspective, I would like to hold it for another at least 5 years. We have owned it for 7 years now, if the money partner doesn't feel like selling, then there will be no problem. If they do want to sell, then I will buy them out.

Thomas, If I include all the other virtual costs (mortgage discharge, realtors, cleaning and vacancy costs), which could be totally around $30K, how can I justify that and present this to the partner? I guess people will accept if those costs occur, but how they can accept if not occur, just try to find a logic reasoning behind that propoal.

Show them the true math on “as if sold” ie all the various fees incl vacant month or lower price if sold tenanted, incl tenant inducements to leave as it is extremely tough to sell with tenants in it. $30,000 might be too low actually.

 

[angelapeng]

Thanks, Thomas. I think eventually we have to show to the investor that their net return on their money over the holding period. The focus is on their ROI.

 

[Thomas Beyer]

Thanks, Thomas. I think eventually we have to show to the investor that their net return on their money over the holding period. The focus is on their ROI.

Show the ROI “as if sold” including ALL costs that you would incur if you sold it. Then feel free to offer him or her that to buy him/her out, or perhaps slightly more. Be reasonable but realistic as there are many MANY fees involved when selling, such as

Realtor costs
Legal fees
Mortgage discharge penalties
Utility costs while holding when vacant
Property taxes
Renovations to make property marketable
Tenant inducements to have tenant leave on a month to month lease that cannot just be cancelled ( say 2-4 month rent )
Accounting costs
Appraisal costs to verify your estimated value

Thoughts on refi vs selling ie the agony and the ecstasy http://blog.reincanada.com/sell-or-refinance-the-agony-and-the-ecstasy

 

[angelapeng]

Thomas, you are right. Being educated here in REIN, refinancing is always the optimal solution to take the equity out. Certainly, for 100% owned property, we will always take this approach. However, for JV property, we need to address the exit strategy at the end of the 5 year contract. The challenges about the refinance in today's market are :

1)We may not be able to refinance and maximize the equity take out due to the new mortgage rules.

2) If the refinance works, how do we treat the equity take out? Is the equity take out treated as principle pay down or profit split? If it is principle pay down, shall we pay back the investor's capital first, then split the rest as profit sharing? The property shall sustain itself financially during the holding period, considering the expenses increase during the next few years, (property tax increase, interest expenses, and all other fees), thus, we don't want to refinance and increase the loan amount too high, so that it can not sustain itself.

Will start the conversation with the partner to see whether they really want to sell.