How would you structure this JV, what terms?

Question

Hi BP,

I've got an opportunity to JV on a rehab flip deal with some other local investors.  This is great for me as i'm new to the game and they can show me the ropes, they have the resources, and most of all they have the experience!

I'm willing to partner in a deal with them by providing some or all of the rehab money (just depends how big of a rehab).  I'm also a licensed agent and they are not, so I can list the property when ready to go on the market and can save us at least 3% commission there (possibly even 6% if one of us found the new buyer).

However, I'm not sure how to structure the JV and how the deal would work. Wanted to ask you what you would do in this case or how it can be a fair, win/win deal.

Purchase Price $130k

Rehab $56k

ARV $240k

They'll be handling the rehab and have the contractors, they also have the Private Lender to fund the purchase. I can bring the rehab money to the table, but rather than just give a loan for interest, I'd rather partner and split profits in the end.

Thoughts on a fair profit split? How do I take title to the property to have a secured investment when I'm not the majority lender?  Any other things I need to consider?

Jason Cox · Answer

so this is a hugely open question depending on motivations, situations financially at the moment for everyone and the current deal flow needed or wanted by your partners. So take these numbers as a starting point, not an absolute.

Many JVs have from a 50/50 split between the rehabber and the money partners to a 75/25 split (25 to money partner). Somewhere between these ranges is where you are likely to fall.

One thing to include in your JV as the money partner is some sort of floor of return if things go bad. You want to be sure your investment is protected and repaid first - so that in a worst case scenario you get paid first if there isn't money left

For us - we have a 15% floor of return. In other words if we are fronting the capital I want at least a 15% on my cost of capital.  No funds get distributed to any partner until the principle and this return is met.

Shadonna N. · Answer

@Jacobo B. as a working partner are you doing all the rehab work?   If so, who pays for additional labor?

Jonathan Godes · Answer

One way to protect yourself as the lender partner if you can't secure 1st position (you need to bring a 3rd party lender into the deal to make the numbers work) is to take title of the property yourself. Then take out the loan from the bank jointly (so your boots on the ground guy has some sort of skin in the game) secured against YOUR asset. Finally, make sure you have a solid JV agreement to protect your partners interest.

This of course assumes the purchase price is far below market rate and you can get out of the deal and break even if everything falls apart at some point.

Frank Buono · Answer

Hi Brian,

As mentioned above there is a lot of ways to structure these types of deals. I think that a JV between money and knowledge should split profit 50/50. Without the money the deal can't get done and without the deal the money just sits around earning nothing. In this deal and especially if you're in FL you should title the property in a land trust with each of the partners as beneficiaries with their agreed percentages. I would use the JV Agreement to spell out the amount and type of contribution each partner must commit. Lastly, I would have a second drawn up on the property to cover all investors. The more that a property is encumbered by the investors, the safer your money is against liens that may arise during the deal.

I like the 15% minimum return clause. I am going to start using that. I hope this helps and please feel free to contact me. I am not an attorney or accountant. Just a fellow investor looking to help.

Good Luck

Jason Cox · Answer

Your overall thought process is right Brian.

Without being the highest money provider you are unlikely to secure a 1st lien. If you are certain on the value a 2nd lien is still a strong position. 2nds get wiped when no equity.

Unsecured is unlikely to be a good call. If you did that you would want personal on all participants and it's still a bad choice IMHO.

Best balance if you really want to participate is to have  a JV agreement created and let the JV entity as a whole take ownership. Then the entity holds title and the operating agreement for the entity would outline ownership percentages and could also outline any distribution rules. Proportional would make most sense and be easiest to manage. Just make sure all parties understand the distribution rules, that all understand differences between member vs manager managed (if an LLC) and that the floors for any sale and any triggers for reductions are clearly spelled out in case the property value doesn't meet what everyone hopes.

I am NOT an attorney (guess I need to add that disclaimer in future?) - just a lot of experience in a lot of different scenarios.

Happy to help, my info is below if you want to email me outside forum for more specifics

Brian Alterman · Answer

@Jacobo B. sounds like a good deal to me.  I might say depending on the size of the project,  your percentage could go up a little.  Thanks for the input!

@Jason Cox The twist, is the JV partners use a private lender.  So, that lender would have 1st mortgage, right?  I could get 2nd, but 2nd isn't very secure. I wouldn't be listed on the mortgage at all.  That's why I'm thinking to put money into a deal as a minority investor, doesn't sound like a good idea.  Only way to have it be secured is to be in 1st position, but probably never going to happen if you're not the majority lender.  But, I've been searching for some examples of JV agreements and the type or wording and terms used in them to get a clearer understanding of how they work and how I'm protected.

I was going to do just a straight loan in the deal with a promissory note stating interest and terms and that I would be repaid upon sale of the property. But, from what I've heard is Promissory notes mean almost nothing in court.  And the only way to have a secured loan is to be listed on the mortgage.  Which for such a small part of the whole investment is probably unlikely.

I know you're not a lawyer (or I assume not), but do you have any opinion on them from a lending standpoint?  If not going to partner in the profits, but just lending money are these a good option to use or is there another way you do it? Again, I'm not taking it as legal advice, only your opinion or how you do your business. Plus, laws could be different in FL vs other states.

Thanks again guys!

Jacobo B. · Answer

I just partner up with someone. I'm the working partner and I didn't put any money in the deal. The split is 75% for him and 25% for me of the profit (after covering purchase price and all the cost associated with the investment). I'm licensed and I get the commission for purchase only.

Now, I only taking the 25% but again, I'm not putting a cent so my ROI is infinite with the potential (now that he saw the profit) that he will put more money to buy 2 to 3 properties at the same time which would increase profit.

Would I stick to this arrangement in the future? I don't know but this is what we have now.

Good luck

Jason Cox · Answer

With our scenario we are lending 70-80% typically. We have done 100% but only on repeat partners, and deals we feel confident we have that level of buffer.

In those cases we actually take title in our investment fund name. The JVS agreement covers profit splits etc.

Since in your scenario you are not lending at all on the purchase and only about half of the rehab I would suspect the most you can fairly ask for is a 1st lien on the property. Even then since you are likely lending at or less than 25% of total project cost they may balk at a lien. In which case I would recommend at a minimum you have an asset specific JV agreement spelling out all distributions.

Brian Alterman · Answer

@Jason Cox Thanks for the details.  Sorry for the delayed response, I never saw the email notification.  So, with your 25-50% share in the profits for lending the money to the purchaser/rehabber, are you lending the entire amount, or at least the majority to be in the 1st lien holder position? I know I want the loan secured, but not sure if I go on the mortgage with the purchaser to secure my investment or another way.  However, I'm also not lending the majority of the money.  I would be lending towards half to all of the rehab costs, but not the purchase.

Mike Sedlacek · Answer

I too am a novice when it comes to partnering. I have never done a partnership. I have always purchased on my own. That being said what is the 15% floor of return? Can you explain that in more details. Thank you.

How would you structure this JV, what terms?

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