Hi everyone,
Does anyone have any experience or advice on setting up structures for complex joint ventures? I am considering investing with a number of other people, we all bring different assets to the table, and I’m wondering about structure as well as a fair way for us to split profits.
The situation is:
Person A is the most experienced in property investment, and is primarily responsible for locating good investments for the group.
Person B is a builder, uses this experience when any renovation/refreshment of property is required, has a good income and credit rating.
Person A already owns investment property with person B in their own names. They can use equity from this property to help secure new property. For the purposes of investment, Persons A and B can be considered one as they are also life partners.
Person C has equity in her own home but is not very comfortable at this point in using it for security. She has a large sum of money available to invest up front, but does not have a regular income for ongoing servicing.
Person D has a good servicable income, but no assets, no savings up front, no property knowledge, and will be totally hands off.
We are wanting a flexible structure (perhaps a company in control of several trusts?) to reflect that circumstances will change over time and various partners will not always be able to commit to a given property.
For example, if person D has a change in circumstances then they may have to pause their investment for a time, so their share of profits must only reflect the properties in which have helped to acquire. But this is complicated when properties gained are then leveraged off to gain further properties.
Equally, some investments may be higher risk than others, and therefor we may find that say Person C and D decide they want to use their combined value to help gain this high-risk property while person A and B choose to sit on previous investments for a while (not risking their own equity).
A couple months back Australian Property Investor mentioned an extended family group that had a structure that allowed the above, but they didn’t mention exactly how it was structured (using trusts or companies, etc).
I will of course discuss this with my accountant, but would like to be as educated as possible in my own right – and would love to hear anyone’s personal experience and advice.
Also, what is your opinion on profit sharing when people are coming to the table with apples and oranges? Cash up front versus Equity versus Income Stream versus Investment Knowledge and Property Selection?
Thanks, Luci
Hi Luci,
We went down this road for a while with our extended family. It’s a can of worms wrapped up in a messy parcel of misaligned goals and conflicts of personalities.
The biggest two stumbling blocks we found were control of the JV and common lenders security.
1. Control
It made sense to have the most experienced PI’s ‘in charge’…but then all the minor players wanted to have their say. That’s fine up to a point, but inevitably there will come a time when forces pull in opposite directions. It always boils down to the old “when push comes to shove”…the minor parties never wanted to be overruled, they couldn’t see why 5% of the JV didn’t have the same stroke of the 60% partner ?? Egos and personalities get caught up in this washing machine of emotions and then all hope is lost. If anyone gets emotional…run a mile.
2. Common Lenders Security
We found that most parties in the JV had existing properties that were invariably sown up tighter than a drum with existing lenders. When the lenders were approached, they all commented that there was little to no point in leaning against the property as there was little free equity. Once again, no JVP was prepared to shift to the other lender as they would incur cost, and no lender was prepared to stand second in line when it came to security issues.
Unfortunately, the whole thing melted down to a “nice idea but won’t work”. I believe family is probably not the best arena to try this out on.
So – what’s the solution you ask ??
I haven’t given up on the idea, and wish to emulate the little soiree Warren Buffett started up in the mid 50’s. He held 6/11ths I believe and had 5 partners holding 1/11th each.
I believe the only way it’ll work is to have one experienced partner “in charge”, and the other partners equal silent financial partners who are prepared to back the guy “in charge” to the hilt. The ‘guy in charge’ needs to be renumerated for his time and effort also.
Equity rich / income poor JVP’s mixing it with equity poor / income rich JVP’s would not cut the mustard IMO. How could one possibly deem what is fair, or more valuable at a particular point in time ??
I’d steer well clear of both handicapped investors and shoot for the equity rich / income rich type every time.
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
I will have a punt on your q’s. I am definately not too experienced or an expert by any means….ok?
We are wanting a flexible structure (perhaps a company in control of several trusts?) to reflect that circumstances will change over time and various partners will not always be able to commit to a given property.Probably a unit trust for each property with a watertight legal contract that dictates exactly how unit shares are sold if one partner wants out or can’t pay. Determine exactly how you will value each unit, ie: bank valuation or realestate quote or comparable sales in area or council valuation or monies investedFor example, if person D has a change in circumstances then they may have to pause their investment for a time, so their share of profits must only reflect the properties in which have helped to acquire. But this is complicated when properties gained are then leveraged off to gain further properties.possibly keep properties separate and use cash extracted out of any equity as deposits for the next property/unit trust
Equally, some investments may be higher risk than others, and therefor we may find that say Person C and D decide they want to use their combined value to help gain this high-risk property while person A and B choose to sit on previous investments for a while (not risking their own equity).keeping each deal separate would solve this
A couple months back Australian Property Investor mentioned an extended family group that had a structure that allowed the above, but they didn’t mention exactly how it was structured (using trusts or companies, etc).Each unit trust could be owned by that persons choice of personal name or company or family trust…………alternatively if you really wanted to bundle it up in one messy ball just create a company as the corporate trustee and make each person with decision making rightts a director and each person with a financial interest a shareholder. Then monies lent to the company from whomever would just be treated as separate loans for tax purposes….messy
I will of course discuss this with my accountant, but would like to be as educated as possible in my own right – and would love to hear anyone’s personal experience and advice.Your accountant is likely to steer you towards their preference and what they are comfortable with rather than an ideal structure,,,,,do you have faith in your accountant.?
Also, what is your opinion on profit sharing when people are coming to the table with apples and oranges? Cash up front versus Equity versus Income Stream versus Investment Knowledge and Property Selection?This comes down to what you think your contribution is worth and whether the others agree, lock it in prior to the deal with legal contract
You are walking into a minefield. If you are able to deals on your own, then do them. It is a lot simpler and easier to get finance. Reemember that if you are a 1/4 share in 1 million $$ of loans you are responsible for the whole lot (this drastically affects your servicability for future loans) and at best will only get a 1/4 benefit of the profits.
Your accountant will give the best tax structure for you piece of piss, but I would be spending a lot of time with a lawyer writing up a JV Agreement that covers everything. Also have a chat with a broker and see how this could negatively affect your future borrowings.
good luck[biggrin]
Live, Learn and GrowLifexperience
hi Luci
with fear that you may not read this post. (deleted) I will answer your post.
your current question is what I setup every day and how I set up my syndicates.
First you have a company.
That is used for gst and the running of the project.
Under that you have a unit trust (depending on how you wish to divest the end product)
each jv member is a unit trust holder. each project is setup separately in the same manner.
being a unit trust the profits can be divided at the start with how it is be done.
These structures are relatively easy to operate and I usually carry a 10 place unit trust with me carrying 5 or 6 places in each structure I organise a fixed price builder and organise the complete lend on the development, including the individual lends on the end product units at the completion of the project.
my jv partners syndicate the hurt money at the start of the project.
I syndicate with family and friends and what we call mule investors that are just putting cash in to get a return.
Once the project is complete the profit are separated and the next project is underway.
lifex
possibly keep properties separate and use cash extracted out of any equity as deposits for the next property/unit trust.
Is exactly what we do and I organise the loans to do it.(in my group)
The structure you organise at the start is very important. here is an example
builder buys option on block of land (7,000,000.00)in a company name.
builder gets da
builder hits a wall from bank because he has to many sites so he decides to sell da site for $9,500,000.00
along comes developer (me)wants to buy site agrees on price $9,500,000.00
builder tells me about above.
problem.
why
1 he has to pay stamp duty on his purchase of land $485,000.00 (he has an option)
2 I have to pay stamp duty on $9,500,000.00 ($898,700.00)
3. he has to pay 40% company tax on any company profit ($2,500,000.00) $1,000,000.00
so out of $2,500,000 (his perceived profit) he will get $1,000,000.00 and we haven’t taken out gst yet.
Had he put it in a specific trust.
He would have possible walked away with the whole $2,500,000.00
He doesn’t know yet, I won’t be buying it for $9,500,000.00 either my guys don’t take prisoners when these come up and we have the complete lend on the $9,500,000.00 already.
This why you need to set these up correctly before you even start negotiations.
If you are in sydney and you wish to talk about this setup come to the meeting on sept 11 and I will explain it further.
This is not financial advice it is not to be seen as advertising for a trust or syndicate nor is it promoting a syndicate.
As you must and should be aware the asic 2/20 rule deals with unit trusts and this post is an answer to the above post and should not he looked on as financial advice I do not advertise nor would I recomend the advertising of specific syndicates and any reference to syndication is of a syndicate that I am currently in and is my own personal view of my own person investment vehicle.here to help
GR,
I see you avoid all of the control disputes and disagreements between syndicate members by taking the balance of power with 5 or 6 places out of 10. Do you still get a legal contract drawn up between syndicate members (ie to make them mules, or is it just mutually agreed)In the setup above, does the unit trust own the property and shares in the company?
Live, Learn and GrowLifexperience
hi lifeX
Yes there are individual agreements setup and the trust owns the land/property and the company is used for gst, build cost, etc.
As for taking out problems I don’t have them as we are aiming for one goal and each person is told from the start who is who and what is what,
if they wish to carry on they do if not there are others waiting.
The control is in the hand of the nominated builder usually with me on the rudder.here to help
One of my clients had a JV between 3 different groups of people. They had a unit trust, with a corporate trustee. The company had 3 directors. Each party then owned 1/3 of the units of the trust using their own discretionary trusts.
They could then purchase property jointly within the unit trust. If one person wanted out, they could sell their units in the unit trust to the other parties, without having to worry about changing the title to the property.
If two of the parties wanted to buy another property, then they could go jointly with ownership by their discretionary trusts, or they could set up a new unit trust.
One drawback is that each party would be responsible for the whole loan. This can hurt serviceability a fiar bit.
Terryw
Discover Home Loans
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
hi Luci and Terryw
If you draw out the equity in cash and then deposit it in a term deposit in the bank ( or lender) that you are lending from you get away from servicability issues and they can tell you are not people of straw, and try not to do two projects with the same lender.here to help
Thanks so much for all your advice everyone. Obviously I need to think/talk many things through with other partner-to-bes (how to value each partners input is always going to be the most difficult and subjective), but the multilayered structured seems the best if we do go forward.
Thanks again,
Luci
Luci,
I would love to hear your reasons as to why you want to JV with these people and what extra benefit you think you will get by doing this?
Live, Learn and GrowLifexperience
You must be logged in to reply to this topic. If you don't have an account, you can register here.
