Basic JV Questions..

[Nir]

Hi All,

There is a serious investor I might JV with. He does not live in Canada. he will provide the money (25% down payment, closing costs, reserve funds) and I will do the rest. It will probably be a 4-plex.

My questions are:

- Working with the Bank: if I apply alone, meaning we put only myself on Title and Mortgage, should I still mention the JV to the banker and provide him with our JV agreement? Does the banker need that information? The down payment money will come from the other investor, however in theory I can also qualify without him so not sure if mentioning the other investor to the bank will only complicate things or is actually mandatory and recommended??

- Management Costs: I plan to put in the JV agreement 10% of the monthly rent as my management costs to be deducted from the monthly cash flow. (the rest will be split 50% 50% on a monthly basis). Does it make sense? Does/should this 10% include property management fees whether I manage the property myself or not. In other words, is 10% reasonable for managing the property and managing the investment? Also, if/when in the future I hire a property management company to do that should I the 10% I`m deducting above to pay them? Meaning from the time I hire them I am left with 4% for managing the investment if 6% will be the property management company fees (10%-6%)?

- Lawyer: I have a good experienced lawyer. Not sure about his experience with JVs but is it safe to say if he has a lot of RE experience such a JV deal will not be a challenge for him to work on as well? What are the legal fees approximately for such a JV agreement (assuming simple JV version)? $1,000? $2,500, in addition to the regular ~$1,500 property purchase lawyer fees?

Thanks & Regards,
Neil

 

[Thomas Beyer]

QUOTE (investmart @ Jul 12 2008, 05:23 PM) Hi All,

There is a serious investor I might JV with. He does not live in Canada. he will provide the money (25% down payment, closing costs, reserve funds) and I will do the rest. It will probably be a 4-plex.

My questions are:

- Working with the Bank: if I apply alone, meaning we put only myself on Title and Mortgage, should I still mention the JV to the banker and provide him with our JV agreement? Does the banker need that information? The down payment money will come from the other investor, however in theory I can also qualify without him so not sure if mentioning the other investor to the bank will only complicate things or is actually mandatory and recommended??
banks or broker will usually ask "where is the downpayment coming from" .. and you have two choices: you lie and get your banking relationship off to a rocky start .. or you tell them which I would highly recommend !
QUOTE (investmart @ Jul 12 2008, 05:23 PM) - Management Costs: I plan to put in the JV agreement 10% of the monthly rent as my management costs to be deducted from the monthly cash flow. (the rest will be split 50% 50% on a monthly basis). Does it make sense? Does/should this 10% include property management fees whether I manage the property myself or not. In other words, is 10% reasonable for managing the property and managing the investment? Also, if/when in the future I hire a property management company to do that should I the 10% I`m deducting above to pay them? Meaning from the time I hire them I am left with 4% for managing the investment if 6% will be the property management company fees (10%-6%)?
3 management fees need to be considered:
a) onsite manager @ $30 to $40/suite/month or so or reduced rent
b) property manager .. about 8% for a 4 plex
c) asset management .. i.e. managing the property manager (assuming it is not you)

so yes, 10% is reasonable .. but not over and above the property manager ..

leave some money (say $15,000 or so for a 4-plex, maybe more if old) in the bank for repairs like: new boiler, new window, paint, new carpets, new bathroom ..


QUOTE (investmart @ Jul 12 2008, 05:23 PM) - Lawyer: I have a good experienced lawyer. Not sure about his experience with JVs but is it safe to say if he has a lot of RE experience such a JV deal will not be a challenge for him to work on as well? What are the legal fees approximately for such a JV agreement (assuming simple JV version)? $1,000? $2,500, in addition to the regular ~$1,500 property purchase lawyer fees?
yes, $1200 to $3000 is reasonable for a JV contract!

be sure to read up on "withholding taxes" for a non-Canadian investor .. so get a tax expert on board also !

consider whether you wish to open a corporation with shares that hold the asset or whether just you are on title w/o a corporation !

 

[Nir]

Thank You Thomas!

Valuable information and good timing too.. I needed it for a call tomorrow.

You are correct, it will be under a corporation. Another corporation already exists holding another asset not related to this investor. should i set up a new corporation for this investor/4-plex or is there a way to put it under the same corporation holding other assets not related to this investor? In other words, is it recommended to open a new corp for every purchase involving a new investor? should that corporation be under both investors or just me is fine? perhaps putting the corp just under my name is better as it will make the banker`s life easier since investor#2 is not a Canadian(?) {I will inform the banker of the other investor/JV agreement anyway)

I will consult with my accountant regarding "withholding taxes" for a non-Canadian investor. As usual Great advice!

Regarding informing the banker, does the fact that the investor is not a Canadian complicate things or not really? what`s the recommended way to involve the foreign investor in the application to the bank in this case?

Regards,
Neil

 

[Thomas Beyer]

QUOTE (investmart @ Jul 13 2008, 06:35 PM) Thank You Thomas!
Valuable information and good timing too.. I needed it for a call tomorrow.

You are correct, it will be under a corporation. Another corporation already exists holding another asset not related to this investor. should i set up a new corporation for this investor/4-plex or is there a way to put it under the same corporation holding other assets not related to this investor? In other words, is it recommended to open a new corp for every purchase involving a new investor? should that corporation be under both investors or just me is fine? perhaps putting the corp just under my name is better as it will make the banker`s life easier since investor#2 is not a Canadian(?) {I will inform the banker of the other investor/JV agreement anyway)

I will consult with my accountant regarding "withholding taxes" for a non-Canadian investor. As usual Great advice!

Regarding informing the banker, does the fact that the investor is not a Canadian complicate things or not really? what`s the recommended way to involve the foreign investor in the application to the bank in this case?

Regards,
Neil

I highly recommend to separate different investors though new companies in case s.th. happens .. you do not wish to endanger investor A because investor B`s JV is not doing so well perhaps or if there is a dispute or: to keep the accounting simpler !

A suggestion: Open one new company with 100 class A voting shares held by you to control the corporation, say 10 cents / share or $10 shareholder capital.

Then have 500,000 class B non-voting shares: 250,000 for you and 250,000 for your JV partner., with nominal value Then his money comes in as a shareholder loan, and you can dividend money out later.

You could also do class B or class C shares, say 250,000 each.

Or you could do 1,000,001 class A voting shares, with you holding 500,001 to control the corporation.

Likely the bank will require a personal guarantee on the mortgage, for sure by you, and possibly by the JV partner. That has to be discussed with your partner as he may not want to do that (i.e. he can loose potentially more than he invests in case of a major disaster !)

Then describe in the JV agreement (also called a USA, a unanimous shareholder agreement) how the money is dividended out, what the management fee is, when to sell, who gets paid first, shotgun clause, what happens if you die, what happens if he want to sell (but not you), what happens if you want to sell (but not he) ... etc etc etc

 

[Nir]

Thank You Thomas for the quick response and for sharing such valuable information on JVs, Banks and Corp. types!

Regards,
Neil

 

[Nir]

Hello Thomas,



FYI based on information provided by Peter Kinch, it is actually possible to have BOTH Investor# 1 and investor# 2 (as guarantor) on mortgage AND only investor #1 (who could not qualify alone) on title. In other words, apparently the bank will accept a personal guarantee from investor #2 ONLY without one from investor#1.



Here is the link with Peter's feedback:



http://myreinspace.com/public_forums/Real_Estate_Discussion/62-5217-Basic_JV_Question.html



Regards,

Neil

 

[Thomas Beyer]

QUOTE (investmart @ Jul 14 2008, 01:22 PM)
Hello Thomas,



FYI based on information provided by Peter Kinch, it is actually possible to have BOTH Investor# 1 and investor# 2 (as guarantor) on mortgage AND only investor #1 (who could not qualify alone) on title. In other words, apparently the bank will accept a personal guarantee from investor #2 ONLY without one from investor#1.



Here is the link with Peter's feedback:



http://myreinspace.com/public_forums/Real_Estate_Discussion/62-5217-Basic_JV_Question.html



Regards,

Neil


yes .. it depends on the bank !



the question is: is this what the (overseas) investor wants or expects ?

 

[Nir]

You are correct, I`m not sure we will use this option at all. just wanted to share this option/piece of information from Peter with you.

Regards,
Neil