JV flip arrangement on the risk side? (i.e. ends up in the 'red'

[David Slater]

Question re JV flip arrangement on the risk side. I apologies if it's covered already but I could not find this specifically in my search.

We are looking at a property flip JV where 'Party 1', the investor, secures the purchase financing (either funds it or mortgages it) and covers the purchasing and selling costs as well as the carrying costs for the property (let's say $550k). 'Party 2' finds the property, covers all reno related costs (let's say $225k), manages the project start to end, manages the sale of the property.

The split proposed is a 40/60 (Party 1 to Party 2) after all Party expenditures are covered.

Simple example - Property purchase at $475k. Purchasing, carrying, and selling costs net $550k. Reno/repair costs $225k. Property ends up only selling for $550k.

The question is, what is the typically arrangement on the very off chance that the project end up in the red overall - like the above example? Is it:

a) Party 1, the investor, gets paid back first, then Party 2 - putting the majority of the risk on Party 2. In this example Party is out $225k

or

b) There is a 40/60 split on the loss too. i.e. Party 1 is out $90k, Party 2 is out $135k

If b), does anyone have sample agreement language for that?

Lastly, and I hate to drag on this post, but in the above JV scenario, what is the typical title/lien arrangement to cover that side of the risk between the parties? Not sure how much it factors in but this would be in Ontario Canada.

Hopefully I put this in the correct forum.

Thanks