Joint Venture Agreements - Common Practices?

[Nir]

Hi Everyone,

A few questions on JV Agreements – common practices.
some are basic some more difficult I guess :

Management Costs paid out of cash flow – I know 10% of rent is common. (I`m referring to a case where investor #1 manages - management costs paid to him) What if a unit is vacant for a few months? Well, obviously management costs should not be reduced as then there is even more work – to find a new tenant. My question is should the JV agreement mention something like "10% of rent based on most recent collected rent from all units"? How are property management companies calculate their fee? I`m guessing same way - most recent collected rent(?)

Reserve Fund – any good rule of thumb to estimate the amount required there? i.e. 2 months worth of rent? Also, basic question: when using the reserve fund to buy a new furnace for example, should the investors put back the amount taken from the reserve fund, usually 50/50?

JV Agreement Preparation – technical and payment related question:
who should pay for the preparation of the agreement by the lawyer? 50/50? Not sure as on one hand my lawyer will prepare the agreement so apparently we should share the cost. On the other hand, shouldn`t the other investor have his lawyer review and sign the agreement as well? Also, is it recommended that investor #2
hire his own lawyer and should he not even meet my lawyer? well, to sign closing documents I`m assuming both investores usually come to the same lawyer(?)

Mortgage Application: assuming the passive investor #2 is on title and mortgage, should he attend all meetings with the mortgage broker or should he remain "behind the scenes" and investor #1 (who brings knowledge, contacts, etc.) can still take care of it all on investor #2`s behalf? Will the mortgage broker accept that or should both investors just come to all meeting together??

Thanks,
Neil

 

[ChrisDavies]

QUOTE (investmart @ Jul 8 2009, 07:00 PM) Hi Everyone,
A few questions on JV Agreements – common practices.
some are basic some more difficult I guess :

Management Costs paid out of cash flow – I know 10% of rent is common. (I`m referring to a case where investor #1 manages - management costs paid to him) What if a unit is vacant for a few months? Well, obviously management costs should not be reduced as then there is even more work – to find a new tenant. My question is should the JV agreement mention something like "10% of rent based on most recent collected rent from all units"? How are property management companies calculate their fee? I`m guessing same way - most recent collected rent(?)
PM companies are exactly as the rule states, % of rent collected. No rent, no fee; stay motivated to re-rent. While things are full-up and calm 10% is a little rich, so think of it as banking for when things are vacant.

Reserve Fund – any good rule of thumb to estimate the amount required there? i.e. 2 months worth of rent? Also, basic question: when using the reserve fund to buy a new furnace for example, should the investors put back the amount taken from the reserve fund, usually 50/50?
I do three months, and if we have to dip into the fund we hold back 50% of the cashflow to replenish it, unless it`s an expense that triggers a cash-call as defined by the JV agreement.

JV Agreement Preparation – technical and payment related question:
who should pay for the preparation of the agreement by the lawyer? 50/50? Not sure as on one hand my lawyer will prepare the agreement so apparently we should share the cost. On the other hand, shouldn`t the other investor have his lawyer review and sign the agreement as well? Also, is it recommended that investor #2 hire his own lawyer and should he not even meet my lawyer? well, to sign closing documents I`m assuming both investores usually come to the same lawyer(?)
You pay for the preperation. They are responsible for independent legal council on their dime. You can/should also pay if they want to have your lawyer explain the agreement to them. Your lawyer might be the best closer you have. It`s small beans compared to what the relationship will bring, and a good lawyer will help you get a template sorted out that will save you money on future JV`s.

Mortgage Application: assuming the passive investor #2 is on title and mortgage, should he attend all meetings with the mortgage broker or should he remain "behind the scenes" and investor #1 (who brings knowledge, contacts, etc.) can still take care of it all on investor #2`s behalf? Will the mortgage broker accept that or should both investors just come to all meeting together??
I think it`s easier if you handle the details with the broker, but have the investor submit an application in support of yours independantly so you don`t have to deal with the paperwork. You`re the expert, and will be negotiating the terms. They`re just getting their own documents together and sending them in. Most JV candidates are looking for an easy experience, and you can help give them that by streamlining the process for them.

Thanks,
Neil

 

[Nir]

Great input Chris! Thank You very much!

Neil