Real Estate Joint Venture Agreements  

 

 

 

 

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Real Estate Joint Venture Agreements  

 

 

 

 

 

 

Real Estate Joint Venture Agreements

 

 

What is a Joint Venture Agreement?

 

Where property investment is concerned, a Joint Venture occurs where two or more parties associate themselves for the purchase of real estate. The JVA, or JV contract, defines the ownership rights and obligations of each party to the contract.

 

For example, a JVA could comprise two parties:

  1. An Equity Partner

  2. A Debt Partner

When purchasing a property, a lender will generally require a minimum 20% cash deposit in order to finance the property without LMI, or a 10% deposit (5% for owner occupiers) with LMI (Lender's Mortgage Insurance).

 

As investors, this can restrict our ability to grow a property portfolio as we are limited in the amount of cash that we can use for deposits, as well as being restricted by the amount that we can borrow without exceeding our DSR (Debt Service Ratio).

 

There are several ways around this, such as the use of vendor funds, but both problems can also be overcome through the use of JVA's. Let's use the example of a JVA comprising two parties:

 

    • An Equity Partner, who is responsible for putting up the initial 20% deposit

    • A Debt Partner, who is responsible for borrowing the 80% balance from a financier

 

 

In this situation, the Debt Partner could be entitled to all the rental revenue from the property as well as being responsible for all of the loan repayments, property maintenance and management costs.

 

The JVA contract would include trigger clauses. For example, it might state that 5 years from the date of purchase either party has the right to trigger a sale of the property, but that in that case, the other party to the contract legally has the first option to buy. The sale price could be agreed upon to be the median of three independent valuations. Once the property is sold, each partner would be entitled to 50% of the appreciation in value (capital growth) of the property since the purchase date.

 

The variables are entirely up to the parties to agree upon prior to their entering into a JVA together.

 

 

How can they be used?

  1. For purchasing property on a "No Money Down" basis

Many financiers shy away from providing primary finance where second mortgage monies are involved. An alternative is to set up a JVA with an Equity partner.

 

The Equity partner may be the vendor of the property, or it may be another investor with spare cash. Either way, they put up the 20% equity required for you to obtain an 80% loan from a financier.

 

In this case, if you are using a JVA to purchase property on a "No Money Down" basis, you become the Debt partner. The advantage to you is that you won't have to come up with any deposit money. The number of properties that you can buy is only limited by the number of equity partners that you can find and by your borrowing capacity.

 

If you wish to be the debt partner, it shouldn't be hard to find equity partners. You need only offer the vendor of the property that interests you the option of being the equity partner and offer him his full asking price. The vendor has nothing to lose. He gets 80% of his money now, plus a share of the future capital growth when you later sell or buy him out.

 

  1. For purchasing property without incurring any debt

If you have set-up a deal, but do not wish to carry any debt for it, you could seek out a debt partner to do the deal with you. Letís look at an example where you are the equity partner.

 

Suppose youíve made a $260K offer to purchase a $300K property, which the vendor has agreed to. You want to benefit from the capital growth of the property, but do not wish to carry the debt or any negative cashflow for the property. If you didnít know anyone with whom you could partner, you could advertise in the newspaper for an investor. A high income earner could easily obtain a 90% LVR loan ($270K) which would be sufficient to entirely cover the purchase price ($260K) as well as the stamp duty & legals ($10K-$15K).

 

Admittedly, the debt partner would still need to find a financier who will lend based upon the valuation and not the contract price. Alternatively, you could kick in the 10% deposit yourself.

 

The attraction for the debt partner is that he would be able to make an investment property purchase with 100% finance (i.e. No Money Down out of his pocket). He would receive all of the rent, claim all of the depreciations and building allowance, and will have to service all of the expenses. If it were a new property and your debt partner was a high income earner, he may even be positively geared after claiming the allowable deductions. In return for his involvement, he would be entitled to percentage (say 50%) of any capital growth on the property above the $300K initial valuation.

 

You would set a specified period in the JVA (i.e. 10 yrs) whereby either partner could trigger the sale to realise the capital gain, providing the other partner has the option of buying them out first of course.

 

  1. For selling property whilst retaining a right to future capital growth

This is my personal favourite. You may already have a negatively geared property portfolio and be tired of supporting the negative cashflow? Maybe you're just a little bit nervous about all the debt you are holding or are planning to stop working soon. You would like to get some of your cash out, but want to retain a stake in the future capital growth of your portfolio.

 

Instead of selling outright, sell your portfolio, or individual properties within it, to a number of debt partners. This will allow you to:

  • get rid of all your property portfolio debt;

  • get rid of all your negative gearing;

  • extract 80% to 90% of the value of your portfolio now, and still share in 50% of the future capital growth

  • keep the cash you have left over after clearing all your loans

How's that for a deal? Sounds attractive to me..

 

 

Advantages:

 

    • As an equity partner, allows you to realise the benefit of capital growth without assuming any risk, negative cashflow or debt burden

    • As a debt partner, allows you to obtain 100% finance quite easily and to get in on deals with no money down!

 

Disadvantages:

 

You'll be restricted from accessing the capital gains until the trigger date defined in the JVA (unless you achieve mutual agreement with your partner to sell before the trigger date)

 

An unreliable debt partner could cause problems as the debt partner is responsible for servicing the loan and covering all property expenses. Get your solicitor to thoroughly check out your prospective partner. Include caveats, charge clauses, and personal guarantees into the JVA and on the property title. The caveat will ensure your partner canít sell without your consent

 

 

To explore further the possibilities of using JVA's, find and speak to a solicitor with experience in this area.

 

The Elevation Group