Is this Suggested JV Agreement Fair?

[Nir]

Hi All,

There are numerous JV agreements and I guess as long as all parties are happy the agreement is good.

I wanted to ask what you think about the following suggested agreement, does it have the potential to create a WIN-WIN situation for both parties?

Investor #1:

On title
Provides 100% of the down payment required
Gets 6% interest annually on the down payment amount provided
50% ownership of property
(upon sale receives investment capital first, then the balance is split 50/50).

Investor #2:

Manages ALL aspects of the property
Gets to keep any positive cash flow after paying investor #1 6% interest mentioned above and all other expenses
Not on title
50% ownership of property

Please assume an expected CAP Rate of 8% for the purpose of reviewing this suggested JV agreement.

Is this fair? Are the JV agreements you use or have seen, more in favor of (the passive) investor #1 or more in favor of (the active) investor #2 relative to the agreement above?

There are many JV options and I have seen a few other JV agreements myself. However, I would really appreciate any feedback on this version.

As an industrial engineer I always look for efficiency and simplicity. That`s what I really like about the idea above. However, before using/implementing this with a friend, I also want to ensure it is as fair as other agreements(?)

Thanks,
Neil

PS. Clarification: after 100% of the required down payment amount is paid by investor #1 he is not required to pay any additional amount until the sale of the property. Only exception is if both investors agree on property improvements like adding a room or a new roof then they share that expense type only 50/50. (other ongoing expenses like utilities and repair are paid by investor #2 as mentioned who will get to keep the net income if any).

 

[Thomas Beyer]

yes, this is fair .. i.e. a 6% hurdle rate + 50/50 on equity ..

but: do you "guarantee" this rate .. even if vacant for 3 months or with lower rents than expected ? i.e would you subsidize it if negative cash-flow ? Or would you give the investor, say over 5 years, a minimum 30% .. then 50/50 ?

Investor #2 is NOT an investor !! She/he is the manager !!

Who gets re-fi $s if you re-fi in 5 years, but do not sell ?

Does downpayment include any closing costs and/or reserves ? (It should !!)

related post here: 50/50 – is this fair ?
http://myreinspace.com/public_forums/Real_Estate_Discussion/62-2015-5050__is_this_fair_.html

 

[Nir]

Hi Thomas,

Thank You for the great input. It`s good to know you see it as fair too.

"even if vacant for 3 months or with lower rents than expected ? i.e would you subsidize it if negative cash-flow ? Or would you give the investor, say over 5 years, a minimum 30% .. then 50/50 ?":

Yes, even if vacant for 3 months etc. I would pay 6%. simply see it as a 2nd mortgage where you pay back monthly which in a way it is! well, of course whatever you can agree on with the investor but I see it similarly to paying back a mortgage except it`s interest only.

"Who gets re-fi $s if you re-fi in 5 years, but do not sell ?":

Good question. I was thinking about 50/50 when re-fi. is it reasonable assuming the other comment "upon sale Investor #1 receives investment capital first, then the balance is split 50/50)." remains, and both agree of course?

"Does downpayment include any closing costs and/or reserves ? (It should !!)":

Closing costs and/or reserves to be paid by both investors 50/50. so hopefully not an issue

"Investor #2 is NOT an investor !! She/he is the manager !!":

I actually see both as investors. one invests money the other invests time and both own the property 50% 50%.
Another way to explain why both are investors: if investor #2 could somehow get 100% financing from the bank then you wouldn`t say "he is not an investor but a manger", right? Actually, one can say investor #1 is more like a bank or second mortgage not doing anything else. so it really depends on how you look at it. However, since each own 50% I see both as RE investors.

Regards,
Neil

 

[Thomas Beyer]

QUOTE (investmart @ Jul 1 2009, 07:26 PM)
..



"Who gets re-fi $s if you re-fi in 5 years, but do not sell ?":



Good question. I was thinking about 50/50 when re-fi. is it reasonable assuming the other comment "upon sale Investor #1 receives investment capital first, then the balance is split 50/50)." remains, and both agree of course?



..




usually you pay the investor first .. as you may take a profit that may not be there in the future if values drop !




QUOTE (investmart @ Jul 1 2009, 07:26 PM)
....



"Does downpayment include any closing costs and/or reserves ? (It should !!)":



Closing costs and/or reserves to be paid by both investors 50/50. so hopefully not an issue..




Essentially you are saying that the money partner gets more than 50% .. think this through .. this is NOT common .. usual is that ANY money needed for closing + reserve + upgrades comes from money partner. Of course, if you also contribute a portion of the money .. then the deal should be restructured such that the money portion gets X % of profit and the manager/expert 100-X% !




QUOTE (investmart @ Jul 1 2009, 07:26 PM)
....



"Investor #2 is NOT an investor !! She/he is the manager !!":



I actually see both as investors. one invests money the other invests time and both own the property 50% 50%...




indeed .. but the one person gets a return on time and his expertise and his connections/team .. and the other a return on money .. hence the "time investor" is usually not called an investor but the manager or entrepreneur or real estate expert !



read this laundry list you'd do here .. you may be giving up too much profit !



http://myreinspace.com/public_forums/Real_Estate_Discussion/62-2015-5050__is_this_fair_.html

 

[Nir]

Thanks again Thomas for the input!

You mentioned it is reasonable/fair if I pay investor #1 interest on the down payment amount (say 6% on his money). Note: 6% on the DOWN-PAYMENT ONLY even if it`s just 10% of purchase price! and I KEEP THE REST meaning I get to keep any positive cash flow after paying all expenses incl. mortgage and investor #1 interest.

In this case, should I SIMPLY PAY FOR ALL property related EXPENSES OR should we still prepare a list of "property improvement" items like new roof or adding a room to the property - things that improve the property and add value to it - and split those expenses 50/50?

(for simplicity pls assume adding a room is just in theory and we will not really do that. then is it reasonable i pay for roof, furnace, etc when needed... again, reminder: i get to keep positive cash flow)

Regards,
Neil