Joint Venture agreements are the best way to leverage OPM (Other People\’s Money).
The most popular Joint-Venture Agreement involves a money partner and a working partner. Here is a breakdown of what each partner has, and what they are looking for:
The money partner wants: a way to invest their cash but not their time (passive), specifically in real estate, and specifically with a partner who can ensure that the investment is going as expected. Their responsibilities will include:
Buying the property, Renovations (financing) Refinancing the property
The working partner wants: a way to invest their time but not their cash (active), specifically in real estate. The working partner will be at the site often and their responsibilities will include:
Property Maintenance, Renovations (execution), Property Leasing and Tenant Management
The money partner will be on title, either because they pay for the property in cash or because the mortgage is in their name (in Canada the mortgage holder must be the person 100% on title).
Common clauses in a JV agreement:
Preamble: explains that the two partners have had an agreement in-place for some time. This is only helpful if the partners require a legal contract to be drawn up after the property has already been purchased, and future disputes about the history of the agreement are prevented.
Holding in Trust: allows the working partner to have legal partial ownership of the property, typically 50% on smaller properties and as low as 30% on larger properties. In Ontario, the director of titles has created a prohibition of trusts being registered in the land-title system (similar to a lien) however the contract makes this a legally binding agreement.
Rental Income Clause: allows the partners to split the net rental income (gross income minus expenses).
Expenses Clause: allows the working partner to be able to charge specific items back to the money partner, such as mileage. Also may allow the working partner to use a credit card provided by the money partner. Also ensures that the money partner reimburses the working partner for their expenses in a timely manner (e.g. 30 days).
Exit Clause: allows the partners to sell the property, allowing the money partner to recoup their original investment in the property and half of the increase in value of the property, minus expenses. This also allows the working partner to be paid out half of the increase in value of the property, minus expenses.
Buy-out Clause: allows either partner to buy out the other partner, typically with a property valuation between the current valuation minus costs, minus the original purchase price.
Back-out Clause: allows either partner to back out of the deal, leaving the money partner as the sole owner of the property and the working partner as free of their obligations to the money partner.
There are other clauses too but this article is not finished yet. (It\’s a blog, not a magazine.)
References:
\”Money People Deal\” by Stefan Aarnio