Need advice on setting up a JV where I manage the funds/assets

[Nayt Grochowski]

I am working with a small group of investors and we are putting our funds together to purchase properties that we will sell with seller financing to generate cash flow. The plan is that my LLC will be managing the assets, basically handling the acquisition, marketing, sale and collection/distribution of cash flow. Plus when we sell a note, or get refinanced out, I will take those proceeds and get more properties back in to keep generating cash flow. This is a long term investment/hold strategy we are building up as a group. I plan on taking a fee as a % of the cash flow disbursements for doing the work, along with putting my own capital in for the initial funding.

I would also like to repeat this with more people and create new partnerships down the road. Want to make sure I am setting up the JV correctly between my LLC and the other people/LLCs and that it is easily replicable. Each partnership will be its own group, the assets of each would be completely separate from each other. Once a group is formed and each person has their % of the relationship, it's locked in.

Some of the key points for the partnerships to still be worked out:

• How to exit the partnership – plan is to put a value on the assets/cash we have at that time and allow the other members of the JV to buy out the partner. And if current partners don't have capital to buy out, open it up for a new partner to replace them. Anyone have other ideas/issues with this thought?
• Taxes on sold properties that we then reinvest into more – Do we take the tax hit, or is the purchase of additional properties counted as a business expense, or if not is a 1031 possible. We could have this happen multiple times a year too, so looking for something not too complex.

Obviously the JV has much more in the agreement, but these are the main areas I am not sure about.

Has anyone set up JV groups like this and have experience and tips you would be up for sharing?

[Bill Gulley]

First, check into a SEC 506d as to pooling investors, both Brian's mention by the other Brain will have more to that.

You are absolutely describing a mortgage brokerage operation, originating seller financed notes, selling the notes (?) and distributing interests in factionalized notes. Selling to owner occupied homeowner's means your brokerage will need to be compliant with Dodd-Frank, the SAFE Act, Reg. Z, C, D, Truth-in-Lending, Equal Credit Act, RESPA, Fair Credit Reporting Act, as applicable as you will not be just a homeowner seller financing but a dealer, brokerage operation. 

Need to look at Dodd-Frank as to seller financing a property that has any construction accomplished, it's not allowed  for dealers generally.

Forming an investment pool does not grant licensing as a mortgage operation, that will require registration and licensing. 

Your idea in general is not a new one and it carries some other concerns of old operators doing seller financing. You will now have predatory lending and dealing issues with underwriting your buyers as well as the sale price being at fair market value. To make money you'll need to buy right, if you work on the property you'll have the issue mentioned with construction/rehab. There may not be much room to profit buying general inventory.

It's a simple idea really, might realize that if things were that simple, everyone would be doing it. Doing a few seller financed transactions would be fine, at the scale you mentioned and implied, financial compliance is going to cost you. Additionally, being "in the business of" is not simply investing for you (and perhaps partners) and you will also have loan servicing requirements. While there are exceptions for small portfolios, there are still basic areas of compliance and servicing practices that will need to be followed, so, more compliance. 

As to you "buy out" you need to define those events that trigger a partner's option to sell or buy, it may not be a simple FROR but a priority of which partner has the first opportunity too. Check state laws carefully as to liquidation of an entity with partners, contributions generally dictate priority on a % basis, unless you specify differently, state law will govern.

As to taxes, it's generally ordinary income from business operations, you can defer taxes with the principal as it is received. I hope you have accounting experience too, it can be a real bear and you'll need a CPA familiar with "banking". I'd suggest too that you not try to employ 1031 transactions, since you're flipping and there is additional costs involved, it just wouldn't pay. Bite the bullet and just make money!  

If you're serious, you really need to find 3 attorneys,  one dealing in securities law, another in finance and another in real estate, these are all specialty areas, I've never met one guy/gal that can cover all three areas in the level of detail you will require. Good luck :)