Why Joint Venture?
On this website you can read info regarding syndication here
(This is not legal or tax advice talk to your advisor for their advice).
Joint Venture Alternative To A Syndication.
In a Joint Venture you are on a team, and all have a role. A typical Joint Venture will not have more than 5 members.
There are 3 main ingredients when it comes to a successful joint venture partnership and they include someone to bring, 1 or more to the table.
A Joint Venture is primarily governed by contract law and involves a few business partners who, regardless of whether they invest in the deal or not, are all actively involved and each contribute unique skills to the overall success of the project. Unique skills may include, for example, construction management, property management, due diligence, underwriting, searching for financing, handling accounting and legal, etc. Just like in team sports everyone plays a role. However, these must all be real significance skills.
Active Investors Get Major Tax Benefits.
If you were a limited partner in a syndication. You will be considered a passive investor. You could get deprecation write offs, but in comparison if you were an active With a Joint Venture, you will be considered an active investor.
Passive Activity: What Is It?
Passive activity is any activity where the investor does not “materially participate” (as defined below) in the activity of the investment. By default, unless there are certain fact patterns, real estate is considered a passive activity.
Passive activity losses can only be used to offset passive activity income. So unless you have other real estate or passive investments that are generating a taxable income, the losses created by the real estate entity will not shelter other taxable income. Rather, they will be carried forward until you generate some passive income or sell the investment.
Active Participation: What Is It?
Active participation is an exception that only applies to real estate investments. If you actively participate by making management decisions, such as approving new tenants, approving expenditures as well as having at least a 10% interest in the investment, then you may be able to take some of the passive losses if certain conditions are met.
If your modified adjusted gross income (MAGI) is $100,000 or less, then you can deduct up to $25,000 of passive losses. For every $2 above $100,000 you lose $1 of the deduction. Once your MAGI hits $150,000 you will not be able to take any passive losses (assuming you do not have any passive income).
Taxes are your biggest expense. Reducing or eliminating them pays immediate returns.
The tax laws are written to support business owners and investors who create jobs and housing. The laws benefit the risk takers the doers who help grow the economy.
Did you know you can hire a company when you purchase an apartment and they can fight/negotiate with the county to lower your property taxes?
You also get depreciation. Depreciation (Paper loss that IRS allows to be deducted from your active income). Depreciation is a non-cash deduction It reduces taxable income from the investment property. But, in contrast to property taxes, mortgage interest, utilities, insurance and repairs, it doesn’t require any cash outlay. The depreciation expense deduction can result in a positive cash flow property becoming a loss maker for tax purposes.
Deprecation allows you to shelter income from your real estate investments. It is a phantom expense unique to real estate, meaning you get to deduct an expense on your tax return but not actually incur the expense. Another beauty is that investing in apartments will lower your taxable income through depreciation.
For apartments that are 5 units and up, the deprecation time frame is 27.5 years of straight line deprecation. Lets say the property is worth 2 million. 1 million is value of the land and the property and its contents is worth 1 million too. You can only deprecation the property and not land. So each each for 27.5 years, you can have a phantom loss of $36, 363.64. You do that for 27.5 years.
If someone bought the property you sold, they would end doing the same thing. This allows for you to keep more cash flow, and then remember the leverage where you only have to put up 20% for the down payment. So you can claim 100% of the depreciation although you don’t own 100% of the property because you are still making payments to the bank for the mortgage.
More tax write offs!
- Mortgage interest
- Real estate taxes
- Utilities if paid by owner
- Repairs and maintenance (cleaning, landscaping etc.)
- Cost Segregation and Depreciation
- Professional services (property management, attorney, accountant etc)
- Travel expenses to the property
- Incidental business expenses, (home office, office supplies etc).
- Independent contractors.
Roles must be defined, and records must be kept in order to satisfy any legal challenge of the legitimacy of the joint venture.
|Loan Guarantor and Experienced Investor|
|Mail letters to owners and work with Brokers|
|Work with the property manager who will handle the money distributions based upon what the JV agreement states. These payments will need a ACH application so that their distributions are deposited directly into each bank account.|
|On a monthly basis, provide the financials (trailing 12-month income and expenses and a current rent roll).|
|Create a credibility kit for owners and brokers|
|Find real estate attorney to make the Joint Venture Agreement and to oversee Contracts and Negotiations and create the JV LLC|
|Create investment criteria|
|Find a property management company in advance that will also be present during due diligence and to help with creating operating budget|
|Set up bank accounts|
|Work with Real Estate CPA to guide and help with sending 1 tax documents to team|
|Building relationships with the commercial real estate brokers and implement off-market lead generation strategies. Subscribe to their list.|
|Provide the down payment and earnest money|
|Post contract Due Diligence|
|Underwrite deals to develop LOI|
|Charge of Physical Due Diligence|
|Charge of Financial/Contract Due Diligence|
|Work with attorney to set up LLC with new property|
|Submit Letter of Intent|
|If offer is accepted work with Attorney for the Contract|
|Evaluate potential investment target markets|
|Secure financing with Bank/Mortgage Broker|
|Ensure successful close|
|Ensure the successful take over and ongoing management of the apartment community|
|Calculating the projected rental premiums based on your rehab plan (through a rent comparable analysis) both of which should be completed during the underwriting and due diligence phases – and running these figures by your property management company for approval, all before actually closing on the deal.|
|Forming an operating budget (often referred to as the pro forma)|
|Implements the business plan|
|Weekly performance reviews with the property management company|
|Frequently analyze the market to determine the best time to sell|
|Oversee the budget. gaining access to your property management company’s online reporting systems so that you can review the monthly financial statements. You will be comparing the budgeted expenses and projected rental premiums to the actual figures on an ongoing basis, making adjustments when necessary.|
|Before closing the deal, you want to schedule a weekly call with your point person at the property management company to go over and track the property’s key performance indicators. Examples of KPIs to track are, but not limited to:|
|Analyze gross potential income, collected rent, delinquency|
|Analyze number of new leases, notices, renewals, waiting list|
|Find, interview and select property management company|
|Frequently analyze competition to set rents|
|Analyze vacancy, rent ready units, units not rent ready|
|Analyze current occupancy`, move-ins and move-outs|
|Visiting the apartment community at once a month. However, don’t announce every one of your trips. Take pictures and videos.|
|Occupancy and pre-lease occupancy rates|
|Renovation updates (i.e. how many units have been renovated?)|
|Rental premium updates (i.e. are we meeting or exceeding our projections?)|
|Capital expenditure updates|
Here is a sample of the joint venture questions that will be answered in a future agreement that is written by an real estate attorney. This helps avoid conflicts, and issues because everything is though of in advance.
- What happens if one of us dies?
- If one of us gets hurt, sick, etc. and can no longer contribute to the partnership how will it affect ownership and profit splitting?
- How will we handle a large disagreement?
- Who gets the final say?
- What happens if one of us becomes financially insolvent?
- What if one of us declares bankruptcy?
- What happens if one of us gets a divorce and in the settlement our spouse gets half of the interest in the partnership?
- What will each of us be providing?
- What is each of us not allowed to do?
- Who owns what is created via this partnership such as intellectual property and mailing lists?
- What do we hope our business looks like in two to four years?
- What values will be most important to our company?
- What is the biggest one-year goal for us/our partnership?
- Do we plan/expect for roles to change with time?
- Do we have an exit plan?
- Do we have a desired timeframe for our exit?
- How will we divide profits?
- What happens if we don’t live up to our responsibilities?
- How will we dissolve the partnership?
- How often will the partners meet to discuss business?
- How will we measure job performance and hold each partner accountable for meeting expectations?
- What partnership structure will we choose and how will that affect our taxation?
- Will the Agreement limit the joint and several liability that partners have by law for their partners’ behavior?
- Will the partners’ contractual commitments and representations bind me?
- What is my liability if my partner does something illegal while representing the company?
- Who is responsible for what percent and kind of company debt?
- How will authority and decision making be structured?
- Will partners have authority to control certain functional areas of the business without the approval or involvement of the other partners?
- What is the authority to act on behalf of the company without unanimous agreement?
- What is the procedure for borrowing money in the company name?
- What is the scope of expense account authority before needing to consult with the other partners?
- Who will handle what? How will your roles and responsibilities be divided?
- Who will have what management duties?
- How will workload be assigned and monitored?
- How will we choose a lawyer, accountant, banker, insurance agent or any other professional service provider?
- What process will be used to expand and admit new partners?
- How will we select vendors and suppliers?
- What kind of business liability and/or property damage insurance will we purchase?
- Will we provide medical, life or disability insurance or a pension plan for ourselves and our employees?
- Will we provide key man insurance on the lives or disability of the partners?
- What are the ownership percentages?
- If one partner had the original idea for the business, should he receive compensation or additional ownership rights?
- How will profits be apportioned?
- How will losses be allocated?
- What amount of profits will be withheld for investment back into the business?
- How will company perks be assigned? Cars, stadium/theater seats, etc.
- What happens when there is a serious family illness, disability, or some other life event that disturbs a partner’s ability to work productively?
- What extent of absence from productive work will require renegotiation of the partnership agreement?
- Who will keep the books?
- What financial statements will the partners receive?
- Are there any restrictions on engaging in other outside business activity?
- What happens to the business assets if a partner leaves or dies?
- What restrictions and approvals apply to a partner selling his share of the business to a third party?
- Do the other partners have a right of first refusal for the shares of a partner who dies or leaves?
- What is the process for firing a partner for incompetence or malicious behavior?
- What happens if a partner becomes impaired by drugs or alcohol, or gets arrested?
- How will the arbitrator/mediator be chosen?
- What is the procedure for amending the partnership agreement?