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What is a More Common JV - 50-50 Ownership or % Ownership Depends on the Down-Payment required/provided by Investor B?

Nir

Nir

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Hi,

Assuming down payment required is 25% and the passive investor (`Investor B`) provides the entire amount, which of the following is a more common JV agreement:

- Passive Investor pays the down-payment (25%) and owns 50% of the property or passive investor pays the down payment required (25%) and owns only 25% of the property? (I think the first option which is why I wanted to ask the next question too..)

- Same question when down payment required is only 10%!(?) is it still most common that investor B owns 50%?

For simplicity let`s assume everything else in the agreement is the same, i.e. 10% interest paid quarterly to the passive investor on the down payment amount provided.

THANKS,
Neil
 
Your first option (ie 50% ownership) from what I`ve seen in REIN model

What I`ve seen other people structure and propose outside of REIN is that no one in their right mind is going to front 100% of the money for a building and only want 50% ownership...
 
The short answer is yes, the ownership split should be relative to the capital invested by the money partner. But I come at this with more flexibility.

First, you should come to an agreement with your prospective JV partner on an ROI (an annual percentage return). If you cannot agree on their expected ROI then don`t waste any more time on that investor - move on to the next prospect.

Once you have an agreed ROI you can then tailor the proposed `split` of the subject property to produce something just above that agreed ROI target to your JV Partner.

In our REMA software we allow you to offer different percentages of each of the 3 components of real estate ROI. This allows you to make a proposal that truly fits the specific objectives of your partner. The 3 components of ROI are:
1) Cashflow
2) Mortgage pay-down
3) Appreciation

As an example, let`s say you have a JV prospect who wants a safe and sure return of 10% annually, and who is willing to give up some upside to get that secure return. And let`s say her 10% ROI would be achieved if you offered her 100% of the cashflow, 50% of the pay-down and none of the appreciation (of course these percentages will vary with the specific property). If this also fits your investing criteria you have the makings of a deal.
 
Hey guys, the question/scenario I wanted to ask about is a little more specific:

Assuming:
1. The other investor (not you) put the entire amount required down.
2. That amount is 10% of the property.
3. You both agree that the other investor will get 10% interest. Example: $250K property. 10% down=$25K. annual interest you pay the other investor = 10% = $2,500 annually.

Please note: Both of you agreed that you keep what ever is left from the cash flow after paying the investor $2,500 a year.

What % ownership do you believe would be MOST COMMON to offer the other investor (not you) in this case? 0%, 25%, 50%, 75%?

My dilemma is on one hand millions of people would be very happy just getting 10% interest on their money without owning anything (well, except their initial contribution of course) - still much higher than the ~3% the bank offers! On the other hand they might expect a significant ownership of the property as well thinking about it from your point of view understanding you put nothing down.

Lastly, logically, shouldn`t the % ownership offered to the other investor be different (lower!?) when they put 10% down compared to 25% down?

Thanks.
 
QUOTE (investmart @ Jan 25 2009, 02:05 PM) Hey guys, the question/scenario I wanted to ask about is a little more specific:

Assuming:
1. The other investor (not you) put the entire amount required down.
2. That amount is 10% of the property.
3. You both agree that the other investor will get 10% interest. Example: $250K property. 10% down=$25K. annual interest you pay the other investor = 10% = $2,500 annually.

Please note: Both of you agreed that you keep what ever is left from the cash flow after paying the investor $2,500 a year.

What % ownership do you believe would be MOST COMMON to offer the other investor (not you) in this case? 0%, 25%, 50%, 75%?

My dilemma is on one hand millions of people would be very happy just getting 10% interest on their money without owning anything (well, except their initial contribution of course) - still much higher than the ~3% the bank offers! On the other hand they might expect a significant ownership of the property as well thinking about it from your point of view understanding you put nothing down.

Lastly, logically, shouldn`t the % ownership offered to the other investor be different (lower!?) when they put 10% down compared to 25% down?

Thanks.

This person is either a lender nor an investor. You are describing a hybrid - with a best of both worlds scenario for them. You say they get only a fixed return, but then go on to describe an ownership position also. It seems to me they want a guaranteed return and the upside potential of an equity position. Where is their downside risk? Are you not taking more of that risk on to yourself in this relationship? If you are paying them interest, how is the loan documented?

On your last question, the answer again should be reflective of the combination of the amount invested, the financial performance of the property and the ROI agreed on. By this I mean their percentage of ownership should depend on the specif property`s cashflows, appreciation, and mortgage pay-down (very different on a 25 year amortization than on a 35 year amortization). And if you buy the property well below market value then there is also an instant equity gain to consider.

I really do recommend you should work from the agreed ROI - and you will find the percentage split for the property.

Read more excellent posts on this thread started by Thomas Beyer quite a while back:
50/50 .. is this fair ?, What is an equitable split between RE expert and investor
 
QUOTE (GarthChapman @ Jan 25 2009, 05:39 PM) Read more excellent posts on this thread started by Thomas Beyer quite a while back:
50/50 .. is this fair ?, What is an equitable split between RE expert and investor


You guys are so freakin` AWESOME (Garth and Thomas)! I would love to shake your hands one day. I love this forum, I learn SO MUCH every single day.

Ok, my question is basically how does the property management fit into the calculations --Whether I (the non-money partner) do it, or an external property management company does. Would I just take a comparable fee from the cashflow that the external property manager would take if I do it myself (e.g. % of gross rent)? That seems easier for the money partner to understand than me taking a greater % of profits (its also better for my on-going operating costs). Or do i just bump up the "asset management fee" to a certain % of asset value? Or would it be better for me to throw all the options at my money partner and see which one he prefers?
 
QUOTE (investmart @ Jan 24 2009, 11:36 PM) Hi,

Assuming down payment required is 25% and the passive investor (`Investor B`) provides the entire amount, which of the following is a more common JV agreement:

- Passive Investor pays the down-payment (25%) and owns 50% of the property or passive investor pays the down payment required (25%) and owns only 25% of the property? (I think the first option which is why I wanted to ask the next question too..)

- Same question when down payment required is only 10%!(?) is it still most common that investor B owns 50%?

For simplicity let`s assume everything else in the agreement is the same, i.e. 10% interest paid quarterly to the passive investor on the down payment amount provided.

THANKS,
Neil



50/50 is easy and most common .. regardless of cash down as with 10% down only risk is higher too for investor ! Look at the upside and % of ROI for investor and work backwards .. why woudl you give up 50% of profit if 25% might be sufficient ?

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

In life you don`t get what you deserve .. you get what you negotiate !
 
QUOTE (jessandy @ Jan 25 2009, 06:17 PM) You guys are so freakin` AWESOME (Garth and Thomas)! I would love to shake your hands one day. I love this forum, I learn SO MUCH every single day.

Ok, my question is basically how does the property management fit into the calculations --Whether I (the non-money partner) do it, or an external property management company does. Would I just take a comparable fee from the cashflow that the external property manager would take if I do it myself (e.g. % of gross rent)? That seems easier for the money partner to understand than me taking a greater % of profits (its also better for my on-going operating costs). Or do i just bump up the "asset management fee" to a certain % of asset value? Or would it be better for me to throw all the options at my money partner and see which one he prefers?

Charge the Joint Venture a Property Management Fee. It is a standard concept and easily explained and, if you at some point do not want to do that anymore you can merely pay someone else the same amount to do it - so make sure you charge the going rate.
 
Thank You everyone for the input especially Garth for the quick responses!

Yes, I learned a lot from the link you provided initiated by Mr. Beyer.

Personally, I find it so much easier and more efficient to pay the other investor a fixed % interest on his investment (i.e. 10%) rather than involving him with the actual cash flow and recalculating it providing reports periodically.

There is some risk agreeing to pay certain % in advance but it is not much different than the risk buying properties expecting positive cash flow.

Bottom line, as long as the numbers make sense to both sides there is an agreement. I just prefer reaching an agreement that is technically very easy to implement.

Cheers,
Neil
 
QUOTE (investmart @ Jan 25 2009, 10:19 PM) Personally, I find it so much easier and more efficient to pay the other investor a fixed % interest on his investment (i.e. 10%) rather than involving him with the actual cash flow and recalculating it providing reports periodically.

There is some risk agreeing to pay certain % in advance but it is not much different than the risk buying properties expecting positive cash flow.

Bottom line, as long as the numbers make sense to both sides there is an agreement. I just prefer reaching an agreement that is technically very easy to implement.

indeed 10% is usually better for you BUT it is a liability to you .. whereas 50/50 is potentially more expensive but not a liability if ROI is only 45% in 6 years !

try a fixed % is you know you can get out fast through a sale or a re-finance in a year or 2 ..
 
Thomas, Garth, are you saying that offering both % interest and 50/50 is too much/less common and offering either % interest OR % ownership is much more common? Well, then I learned something. Thanks.
 
QUOTE (investmart @ Jan 29 2009, 12:16 AM) Thomas, Garth, are you saying that offering both % interest and 50/50 is too much/less common and offering either % interest OR % ownership is much more common? Well, then I learned something. Thanks.
I said both are OK but have different implications, both options have to be win/win, both have to be doable and both have to be explained to a potential investor !

What is better: taking a bus to work or a car ? Both are "common" and both have their pro`s and con`s ?
 
QUOTE (investmart @ Jan 29 2009, 12:16 AM) Thomas, Garth, are you saying that offering both % interest and 50/50 is too much/less common and offering either % interest OR % ownership is much more common? Well, then I learned something. Thanks.
Agreed. But remember there are many many ways to skin a cat...

As Thomas writes, the deal must be a good one for both parties. Use your imagination.

The challenge is to become educated enough and to have the tools to enable the ability to correctly measure all the elements of the investment and its ROI for both parties, and to properly understand those measures.

Those are the things we have been working most on building into our REMA software, primarily in the Analyzer module.
 
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