JV - Should interest on down payment money (LOC) be part of the expenses of a JV deal?
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It can be whatever you negotiate it to be, but having said that let`s ask ourselves what is really underneath your quesiton. If you re-phrase your question as below what would your answer be?
Did your JV Partner make a loan to the JV or an investment of capital in the JV?
Did your JV Partner make a loan to the JV or an investment of capital in the JV?
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QUOTE (selewis @ Mar 6 2009, 10:06 PM) Small question re: JV.
If my "money partner" makes the down payment out of a line of credit, should the interest payments from that LOC be part of the expenses of the JV before profit splitting? What would be a simple standard approach?
whatever you agree on .. usually NOT though ..
some musings & opinions on JVs and "50/50 – is this fair ?" here:
http://myreinspace.com/public_forums/Real_Estate_Discussion/62-2015-5050__is_this_fair_.html
If my "money partner" makes the down payment out of a line of credit, should the interest payments from that LOC be part of the expenses of the JV before profit splitting? What would be a simple standard approach?
whatever you agree on .. usually NOT though ..
some musings & opinions on JVs and "50/50 – is this fair ?" here:
http://myreinspace.com/public_forums/Real_Estate_Discussion/62-2015-5050__is_this_fair_.html
just want to say thanks to all who have helped me in this new phase of my investment life. looks like i have already found my first JV money partner so i can keep going forward. we`re going to do a simple JV together - her money, my expertise, 51/49 split on all profits (cash flow, principal payments, appreciation). didn`t want to make the first one complicated. it just took a couple of "No`s" from CMHC and from lenders i would normally get a yes from to push me into phase two. had to rewire my thinking and get my head around some new ideas. but it`s already starting to show results. now we`re just trying to settle on a good investment opportunity. we have a couple potential buildings in mind. so, thank you to all who pushed me toward JVs as one of my key next steps. time to "share the wealth"!
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QUOTE (selewis @ Mar 7 2009, 11:49 AM) just want to say thanks to all who have helped me in this new phase of my investment life. looks like i have already found my first JV money partner so i can keep going forward. we`re going to do a simple JV together - her money, my expertise, 51/49 split on all profits (cash flow, principal payments, appreciation). didn`t want to make the first one complicated. it just took a couple of "No`s" from CMHC and from lenders i would normally get a yes from to push me into phase two. had to rewire my thinking and get my head around some new ideas. but it`s already starting to show results. now we`re just trying to settle on a good investment opportunity. we have a couple potential buildings in mind. so, thank you to all who pushed me toward JVs as one of my key next steps. time to "share the wealth"!
The JV Secrets Package is pretty good, but it also seems like you`ve learned a lot already. Just curious, why go 51/49 instead of the simpler 50/50?
The JV Secrets Package is pretty good, but it also seems like you`ve learned a lot already. Just curious, why go 51/49 instead of the simpler 50/50?
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I see it like this, If I put up the LOC funds to make the purchase of the property, the LOC debt would have to be serviced. What do I care if it is my LOC or a Partners? I dont. I service the LOC. You just have to make sure the deal carries it...you get that in the purchase price. You both split the tax benefit of the LOC debt service as well. Obviously getting your Partner to service their own debt makes it better for you, but I would humbly suggest that if they are using LOC funds, they wont do many deals with you if they are effectively in a negative cashflow position carrying all the expense month after month. Cash down guys are in a differant position.
...not a popular answer, but it`s all mine! (smile)
...not a popular answer, but it`s all mine! (smile)
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QUOTE (Nukav @ Mar 8 2009, 11:19 AM) I see it like this, If I put up the LOC funds to make the purchase of the property, the LOC debt would have to be serviced. What do I care if it is my LOC or a Partners? I dont. I service the LOC. You just have to make sure the deal carries it...you get that in the purchase price. You both split the tax benefit of the LOC debt service as well. Obviously getting your Partner to service their own debt makes it better for you, but I would humbly suggest that if they are using LOC funds, they wont do many deals with you if they are effectively in a negative cashflow position carrying all the expense month after month. Cash down guys are in a differant position.
...not a popular answer, but it`s all mine! (smile)
I don`t quite agree, if my investor is putting in their own cash say 40K then that is what they are contributing.
If they put in 40K out of a LOC they are only out of pocket the interest, and I as a RE expert should be researching and selecting a property that cashflows well enough to pay for that LOC interest, altho I will never promise that I will show how I will use my knowledge to select the best available property.
...not a popular answer, but it`s all mine! (smile)
I don`t quite agree, if my investor is putting in their own cash say 40K then that is what they are contributing.
If they put in 40K out of a LOC they are only out of pocket the interest, and I as a RE expert should be researching and selecting a property that cashflows well enough to pay for that LOC interest, altho I will never promise that I will show how I will use my knowledge to select the best available property.
There are many types of structures for a JV partnership. In my opinion and experience, if you have uncovered that your `money man` is borrowing the DP from a LOC then typically they are responsible for the Interest Payments, unless the cash flow can carry this after all other expenses. Again the share structure etc. will play a big part when determining this point.
Hope that helps,
Hope that helps,
QUOTE (nadja @ Mar 9 2009, 01:39 AM) There are many types of structures for a JV partnership. In my opinion and experience, if you have uncovered that your `money man` is borrowing the DP from a LOC then typically they are responsible for the Interest Payments, unless the cash flow can carry this after all other expenses. Again the share structure etc. will play a big part when determining this point.
Hope that helps,
this particular one is just a simple partnership, jv agreement on paper, written up by lawyer. no corporation involved, therefore no shares.
i find the varied responses interesting. if i were investing from my own LOC as an individual investor, i would most certainly cover the costs of that LOC before i figure out my personal net profits. but i expect my partner to not have that privilege? i mean, this works for me. it`s better for me.
i get the other side of this. they invest capital. up to them how they get it. their "problem" if they decide their investment will come from a LOC and they have to service interest payments. just curious how to answer my jv partner if the question comes up, as it most likely will once she figures out she will have interest payments if she decides to go with her LOC for down payment. or the question might be, how do i best preempt her question, with a reasoned reason as to why no interest is paid to her?
Hope that helps,
this particular one is just a simple partnership, jv agreement on paper, written up by lawyer. no corporation involved, therefore no shares.
i find the varied responses interesting. if i were investing from my own LOC as an individual investor, i would most certainly cover the costs of that LOC before i figure out my personal net profits. but i expect my partner to not have that privilege? i mean, this works for me. it`s better for me.
i get the other side of this. they invest capital. up to them how they get it. their "problem" if they decide their investment will come from a LOC and they have to service interest payments. just curious how to answer my jv partner if the question comes up, as it most likely will once she figures out she will have interest payments if she decides to go with her LOC for down payment. or the question might be, how do i best preempt her question, with a reasoned reason as to why no interest is paid to her?
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Why would you burden a JV property with interest on debt for a JV with person A because they decided to borrow their investment in the JV and not from person B because they used cash for their investment in the JV.
This makes no sense if you recognize that your money partner is making an investment in the JV and NOT a loan to the JV.
This makes no sense if you recognize that your money partner is making an investment in the JV and NOT a loan to the JV.
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QUOTE (selewis @ Mar 9 2009, 07:15 AM) i find the varied responses interesting. if i were investing from my own LOC as an individual investor, i would most certainly cover the costs of that LOC before i figure out my personal net profits. but i expect my partner to not have that privilege? i mean, this works for me. it`s better for me.
One form of JV is to give a preferred rate of return, or "hurdle rate" before profits are split !
So you could offer to your money partner:
a) we do 50/50, OR
b) we pay your LOC interest first, then we do 60/40
Please chose one.
One form of JV is to give a preferred rate of return, or "hurdle rate" before profits are split !
So you could offer to your money partner:
a) we do 50/50, OR
b) we pay your LOC interest first, then we do 60/40
Please chose one.
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Another question on this topic...
In a simple JV agreement, do most of you pay the investor`s funds back in FULL before splitting the profits (for example on a re-finance), or if not, how do you mitigate the potential that the initial estimates of growth do not `pan out`?
Thanks,
Yevgeni
In a simple JV agreement, do most of you pay the investor`s funds back in FULL before splitting the profits (for example on a re-finance), or if not, how do you mitigate the potential that the initial estimates of growth do not `pan out`?
Thanks,
Yevgeni
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QUOTE (thomasbeyer2000 @ Mar 9 2009, 08:41 AM) a) we do 50/50, OR
b) we pay your LOC interest first, then we do 60/40
I like this idea Thomas! I may have to try that the next time I get asked who pays the HELOC interest.
To date I have been looking for properties that will create enough cash flow for my JV that will cover a HELOC payment *if* a HELOC was used to fund the investment.
How they pay for it is their business, but if I presume they`re using a HELOC to make the investment, and I can provide them the cash flow to cover that cost, I`m assured they will be happy.
Of course, that further reduces the properties that will work, but that`s a result of the high quality investment opportunity that I bring to the table.
David.
b) we pay your LOC interest first, then we do 60/40
I like this idea Thomas! I may have to try that the next time I get asked who pays the HELOC interest.
To date I have been looking for properties that will create enough cash flow for my JV that will cover a HELOC payment *if* a HELOC was used to fund the investment.
How they pay for it is their business, but if I presume they`re using a HELOC to make the investment, and I can provide them the cash flow to cover that cost, I`m assured they will be happy.
Of course, that further reduces the properties that will work, but that`s a result of the high quality investment opportunity that I bring to the table.
David.
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QUOTE (Yev @ Mar 9 2009, 01:06 PM) Another question on this topic...
In a simple JV agreement, do most of you pay the investor`s funds back in FULL before splitting the profits (for example on a re-finance), or if not, how do you mitigate the potential that the initial estimates of growth do not `pan out`?
Thanks,
Yevgeni
you do whatever you agree on .. such as
a) all money goes to investor until paid in full, then X/Y split
b) you take an upfront sales commission, an acquisition fee, and an annual management fee .. and then a)
c) you take an acquisition fee, and an annual management fee .. and then a)
d) you take an annual management fee, then a)
e) all cash-flow is split A/B, and only equity from a sale or re-fi is treated like a) [ note that cash-flow and equity could be split differently)
f) investors gets 5% interest annually, you get nothing, and then a)
g) investor gets 5% annually, you get a management fee, then a)
h) investor gets X% annually, then his principal back at the end on sale .. you take the rest
i) you sell the property to the JV for a profit, then a) to h)
We do b) .. to line up work with $s .. i.e. we take the BULK of the profit at the end (i.e. our share of equity) after investor has been paid back in full.. but to raise money and to buy assets you (or people that work with you / for you) must be paid when the work occurs, i.e. some at the beginning and some ongoing. We do not uplift building values like most syndicators do (i.e. option i above) .
And yes, there is a possibility that the investor loses money. It is equity ! markets and properties can decline in value. Your JV agreement should cover that, and our offering memorandum points this out and you have to sign a risk acknowledgment form indicating that.
There is also the possibility that you work your fanny off, and make nothing in 5 years, or worse, get called on a personal guarantee.
Life is full of risk .. as is real estate .. or any investment, even a "guaranteed" or "secured" one as the guarantee might be worthless, or the guarantee or security is worth less than the investment.
The Offering memorandum we use has 4 pages of risk.
The idea is to be aware of them and mitigate them.
Can you be dead driving home today in your car .. quite possibly .. so you drive defensively, put on your seat belt, look left and right, take lessons, don`t drink .. yet you still might end up dead.
It is like flying an airplane, when you check in .. they should ask you: Do you know that this plane might blow up ? Do you know that it might land in the water and crash ? Are you aware that buildings have flown into buildings ? Do you know that you could die on this plane ? Once you answer YES 4 times they say "have a safe flight".
In a simple JV agreement, do most of you pay the investor`s funds back in FULL before splitting the profits (for example on a re-finance), or if not, how do you mitigate the potential that the initial estimates of growth do not `pan out`?
Thanks,
Yevgeni
you do whatever you agree on .. such as
a) all money goes to investor until paid in full, then X/Y split
b) you take an upfront sales commission, an acquisition fee, and an annual management fee .. and then a)
c) you take an acquisition fee, and an annual management fee .. and then a)
d) you take an annual management fee, then a)
e) all cash-flow is split A/B, and only equity from a sale or re-fi is treated like a) [ note that cash-flow and equity could be split differently)
f) investors gets 5% interest annually, you get nothing, and then a)
g) investor gets 5% annually, you get a management fee, then a)
h) investor gets X% annually, then his principal back at the end on sale .. you take the rest
i) you sell the property to the JV for a profit, then a) to h)
We do b) .. to line up work with $s .. i.e. we take the BULK of the profit at the end (i.e. our share of equity) after investor has been paid back in full.. but to raise money and to buy assets you (or people that work with you / for you) must be paid when the work occurs, i.e. some at the beginning and some ongoing. We do not uplift building values like most syndicators do (i.e. option i above) .
And yes, there is a possibility that the investor loses money. It is equity ! markets and properties can decline in value. Your JV agreement should cover that, and our offering memorandum points this out and you have to sign a risk acknowledgment form indicating that.
There is also the possibility that you work your fanny off, and make nothing in 5 years, or worse, get called on a personal guarantee.
Life is full of risk .. as is real estate .. or any investment, even a "guaranteed" or "secured" one as the guarantee might be worthless, or the guarantee or security is worth less than the investment.
The Offering memorandum we use has 4 pages of risk.
The idea is to be aware of them and mitigate them.
Can you be dead driving home today in your car .. quite possibly .. so you drive defensively, put on your seat belt, look left and right, take lessons, don`t drink .. yet you still might end up dead.
It is like flying an airplane, when you check in .. they should ask you: Do you know that this plane might blow up ? Do you know that it might land in the water and crash ? Are you aware that buildings have flown into buildings ? Do you know that you could die on this plane ? Once you answer YES 4 times they say "have a safe flight".
okay... nesting another JV question inside this JV question thread...
re: setting up the JV... i have a money partner, and we are interested in a number of small properties, probably buy and hold for a little while, maybe some would be buy and sell after three or five years, depending on where the market goes and other factors... QU: should we set up a new JV agreement for each new property? or can we set up a sort of open-ended JV (e.g. down payment/clsoing costs from one, expertise from another, 50/50 split, whoever on the mortgage depending...), where we can buy two or three or twelve in a row under the same agreement? if the terms are the same, is it advisable to still have a separate agreement for each one?
re: setting up the JV... i have a money partner, and we are interested in a number of small properties, probably buy and hold for a little while, maybe some would be buy and sell after three or five years, depending on where the market goes and other factors... QU: should we set up a new JV agreement for each new property? or can we set up a sort of open-ended JV (e.g. down payment/clsoing costs from one, expertise from another, 50/50 split, whoever on the mortgage depending...), where we can buy two or three or twelve in a row under the same agreement? if the terms are the same, is it advisable to still have a separate agreement for each one?
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QUOTE (selewis @ Mar 9 2009, 05:59 PM) okay... nesting another JV question inside this JV question thread...
re: setting up the JV... i have a money partner, and we are interested in a number of small properties, probably buy and hold for a little while, maybe some would be buy and sell after three or five years, depending on where the market goes and other factors... QU: should we set up a new JV agreement for each new property? or can we set up a sort of open-ended JV (e.g. down payment/clsoing costs from one, expertise from another, 50/50 split, whoever on the mortgage depending...), where we can buy two or three or twelve in a row under the same agreement? if the terms are the same, is it advisable to still have a separate agreement for each one?
the less the better .. so I`d aim for ONE agreement that allows you most flexibility !
You could give the partners an OPTION to exit, such as
Any partner has the right to demand a property sale when
a) the property has gone up in value by 30% or more
b) the property has dropped in value 20% or more
c) 5 years after purchase
d) when he dies or gets divorced
e) when serious health issues require unexpected cash or time demand
f) when the mortgage expires
g) when interest rates are above X %
h) every blue moon
etc. ...
re: setting up the JV... i have a money partner, and we are interested in a number of small properties, probably buy and hold for a little while, maybe some would be buy and sell after three or five years, depending on where the market goes and other factors... QU: should we set up a new JV agreement for each new property? or can we set up a sort of open-ended JV (e.g. down payment/clsoing costs from one, expertise from another, 50/50 split, whoever on the mortgage depending...), where we can buy two or three or twelve in a row under the same agreement? if the terms are the same, is it advisable to still have a separate agreement for each one?
the less the better .. so I`d aim for ONE agreement that allows you most flexibility !
You could give the partners an OPTION to exit, such as
Any partner has the right to demand a property sale when
a) the property has gone up in value by 30% or more
b) the property has dropped in value 20% or more
c) 5 years after purchase
d) when he dies or gets divorced
e) when serious health issues require unexpected cash or time demand
f) when the mortgage expires
g) when interest rates are above X %
h) every blue moon
etc. ...
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QUOTE (GarthChapman @ Mar 9 2009, 09:08 AM) Why would you burden a JV property with interest on debt for a JV with person A because they decided to borrow their investment in the JV and not from person B because they used cash for their investment in the JV.
This makes no sense if you recognize that your money partner is making an investment in the JV and NOT a loan to the JV.
That is exactly my point earlier. If I had the cash I wouldn`t be investing it in the JV if I had the HELOC available. The cash could be used elsewhere or to pay down debt that is non-tax deductible.
Money is incredibly cheap right now, my HELOC is at 2.5%!
This makes no sense if you recognize that your money partner is making an investment in the JV and NOT a loan to the JV.
That is exactly my point earlier. If I had the cash I wouldn`t be investing it in the JV if I had the HELOC available. The cash could be used elsewhere or to pay down debt that is non-tax deductible.
Money is incredibly cheap right now, my HELOC is at 2.5%!