JV-ing an existing property

[matthewrlee]

I have an existing property that a JV money partner is interested in. What is the typical process to JV an existing property? I've been thru the JV Secrets binder, but REIN's material doesn't seem to cover this.



As I understand it:

1) Do an appraisal to determine current market value.

2) Money partner comes in with 20% for downpayment + closing costs.

3) Right now, I'm 100% on title. After JV-ing, we are now 50/50 on title.

4) Right now, I'm on the mortgage (but I no longer qualify for mortgages at all due to personal circumstances). After JV-ing, money partner qualifies for the mortgage completely himself.

5) I will take the 20% downpayment + 80% new mortgage and discharge my existing mortgage. I will then be left with the difference as capital (whilst still retaining 50% ownership).

6) JV agreement will be in place, and both parties will have independent legal advice.



Questions:

1) Any important points that I missed?

2) Even though we are 50/50 on title... assuming that he has enough income and credit, is he allowed to qualify for the entire mortgage himself? Or because I am 50% on title, do I need to qualify for my 50% portion of the mortgage? (NOTE: if it's the latter, this would screw up the entire deal because I can't qualify)

3) Will this 50% transfer of ownership trigger any capital gains taxes? Any other accounting implications I should be aware of?

 

[Thomas Beyer]

Pretty much bang on. Bank may insist for you both to co-own the mortgage, unless you do not get a new one. Depends on the bank. Talk to a mortgage broker re options here. Yes, a sale of 50% may trigger capital gains taxes.



Discuss exit options, what happens if one guy wants to exit pre-maturely but one guy doesn't, or cash-calls say for a new garage door or a new roof.

 

[JBagorio]

Since your $$$ partner will be providing the downpayment, I don't see why the banks will ask both of you to be on the mortgage and title. In that case if your money partner ended up to be the sole mortgage qualifier, then you will not be on title. But you can place a caveat after the fact. One thing, be prepared to be challenged by your partner for a smaller piece of the pie (40/60 possibly); in this case given besides from his/her capital contribution, he/she also owns the full liability.



all the best!

 

[Neil1]

Since you can not qualify nor want to sell and trigger closing costs like land transfer tax, how about the following:

- your new partner pays you 20% of the current appraised value

- no change in mortgage - you continue with same payments.

- sign JV agreement defining your 50/50 structure etc.

- put a caveat to protect your partner as only you are on title and mortgage

 

[tkjca]

I like what Neil said. I would do it that way also.

 

[kfort]

unless there is a solid reason not to, maintain the current mortgage. It will make for a significantly easier sale to your partner. All they do is review the appraisal, review the agreement, write a cheque, and start cashing cheques. No qualifying. And once they know that you CAN'T qualify, that's a definite point of leverage that you've lost.



You'll also have a more secure investment as it will be lower LTV. And depending on exact numbers, you may or may not be paying down more principle per month also (meaning higher return for you and your partner).



This is the approach I'm taking on my most recent property. I find it's simpler and cleaner and win/win.

 

[Thomas Beyer]

Indeed, if you do not need to or want to get a new mortgage then leave your name on it as is. Sell a % of the asset for X $s, and for that you can get more $s if investor doesn't even have to qualify or co-qualify.



My rule of thumb is that they money partners gets 50% of the equity, the expert 30% and the mortgage qualifier(s) 20%. Thus, 50/50 if you stay on the mortgage, or 60/40 if both qualify for and are on the mortgage.



Example:



Property is worth $300,000 .. mortgage is 70% of it or $210,000. Equity is thus $90,000. You sell a 50% stake in the property for $90,000, i..e on exit JV partner gets $90,000 plus 50% of any equity upside and/or mortgage paydown.



In 5 years you sell the property for $360,000 and the mortgage is now down to $180,000. Equity is now $180,000. JV partner gets $90,000 + $45,000 and you $45,000. He makes a 10% ROI/year (plus some share of cash-flow which I assume is invested into asset improvements so I ignored it here) and you buy 1 or 2 more houses with the $90,000 you received from JV partner and/or 3-4 more JVs in that timeframe, recycling your $90,000 numerous time.



Happy JVing !

 

[andyr]

[quote user=matthewrlee]3) Will this 50% transfer of ownership trigger any capital gains taxes? Any other accounting implications I should be aware of?





From my opinion, you will be giving up a 50% ownership in the property and therefore will be triggering a deemed disposition. However, this also creates a loan owed to the co-venturer and the co-venturer is receiving 50% of the liabilities. As long as the liabilities equals the assets there should be no tax consequences.



You would need to be careful on the JV agreement wording and get some help from an accountant as well.

 

[WadeSha]

One question here on Neil's proposal: does the bank have to be notified of and approve the JV deal?

 

[Thomas Beyer]

[quote user=WadeSha] One question here on Neil's proposal: does the bank have to be notified of and approve the JV deal?


Technically yes, as they can deem the loan in default and call it. In all practical instances that will not happen, even if the title changes from you to you and JV partner. However, on refi likely the two of you will have to qualify, unless you just wish to get an extension at poor interest rates (i.e. rack rates).

 

[Thomas Beyer]

[quote user=andyr]Will this 50% transfer of ownership trigger any capital gains taxes?
If your 100% equity used to be $60,000 on asset acquisition, thus 50% was $30,000, and now the property equity (through mortgage paydown and value increase) is $90,000 and you now sell 50% equity of the property for $90,000 ( but a payable of $90,000) then you have a $15,000 capital gain (or income) on the 50% portion of $30,000, and have to declare $15,000 of the $90,000 cash receipt as a capital gain (or income) in my humble opinion. Of the remaining $75,000 $60,000 is repayment of equity and the $15,000 is a deferred gain where taxes are payable when you dispose of the property eventually. But, perhaps a tax expert can enlighten you more here, as this is only my opinion, and not tax advice.

 

[Joel]

[quote user=ThomasBeyer]

My rule of thumb is that they money partners gets 50% of the equity, the expert 30% and the mortgage qualifier(s) 20%. Thus, 50/50 if you stay on the mortgage, or 60/40 if both qualify for and are on the mortgage.





Thats a great point! Thanks Thomas

 

[matthewrlee]

[quote user=Neil1]Since you can not qualify nor want to sell and trigger closing costs like land transfer tax, how about the following:

- your new partner pays you 20% of the current appraised value

- no change in mortgage - you continue with same payments.

- sign JV agreement defining your 50/50 structure etc.

- put a caveat to protect your partner as only you are on title and mortgage




[quote user=kfort]unless there is a solid reason not to, maintain the current mortgage. It will make for a significantly easier sale to your partner. All they do is review the appraisal, review the agreement, write a cheque, and start cashing cheques. No qualifying. And once they know that you CAN'T qualify, that's a definite point of leverage that you've lost.



You'll also have a more secure investment as it will be lower LTV. And depending on exact numbers, you may or may not be paying down more principle per month also (meaning higher return for you and your partner).




[quote user=ThomasBeyer]Indeed, if you do not need to or want to get a new mortgage then leave your name on it as is. Sell a % of the asset for X $s, and for that you can get more $s if investor doesn't even have to qualify or co-qualify.






Thanks Neil1, kfort, and Thomas for your opinions. Interesting approach, but unfortunately (or fortunately, depending on your viewpoint) the appreciation and mortgage paydown are at the point where I'm at 50% LTV on the property. My goal is to free up as much capital as possible (since I'm looking at rolling forward in a bigger project), so having my partner pay me 20% of appraised value still leaves a lot of my untapped capital in the property. I still think I'd need my JV partner to qualify for a new mortgage in order to free up the rest of that 30% equity.



But I did like the idea, since it doesn't trigger Ontario land transfer taxes and Toronto land transfer taxes (yes, the property is in Toronto!!), which would increase the funds necessary and reduce the returns for the JV partner. 50% title transfer would trigger land transfer taxes of $15,200. Brutal.



Questions:

1. Any other ideas that might be worth exploring in order to structure the deal so I can get all my capital out?

2. Regarding LTT, can I transfer just 1% title to my JV partner, thereby reducing the LTT payment to $11.50 instead of 50% title transfer payment of $15200? How is the JV partner protected in this case (since he would have 50% equity, but only be 1% on title)?

3. Regarding qualifying for the mortgage... if both myself & JV partner qualify for the mortgage, does that we mean that we each have to individually qualify for the entire amount of the mortgage? Or does it mean that our combined resources (income, credit) need to qualify? Is this affected by #2 above?

4. If I'm not in a good situation right now (self-employed, no 2-3 year track record of consistent income yet) to qualify for mortgage, does me going down on the mortgage (together with the JV partner) actually hinder or help in the mortgage qualification process? i.e. is it better for both of us to try to qualify, or is it better for just the JV partner to qualify?