Joint venture partnerships can be a very good way to finance a real estate transaction. Also they can be handled in a variety of ways. The most common way is, one partner puts up cash and the other puts up his interest in the deal and/or his services in managing the property. The joint venture agreement will spell out how the money is contributed and disbursed. Title to the property is generally held in the name of the joint venture. But title can be taken in the name of one or both of the partners as well.
Using a partner to finance deals can be very effective on a transaction. Sometimes a joint venture partnership looks similar as a general partnership, because it is not specific to any one particular property. For example, a group of investors, can pool money together for the purchase of properties. This type of arrangement should be approached with extreme caution because it looks more like a general partnership than a joint venture. It also may cross over into securities regulations, particularly if you are the one soliciting money from other investors.
Legal Issues
Owning real estate jointly with other parties is an effective financing tool, but it can also be a liability. Under the Uniform Partnership Act, the law holds all partners liable for each other’s actions. Thus, if you are a “silent” partner, you could be held liable as the “deep pocket.” Consider setting up a limited liability company (LLC) or limited partnership for joint venture projects. The owners of an LLC are shielded from liability for activities of the company and the activities of each other. Limited partners (but not general partners) of a limited partnership are similarly shielded from personal liability. For more information on LLCs and limited partnerships, visit my Web site at <www.legalwiz.com/LLC>.
Alternative Arrangement for Partnership
Rather than having a partnership own the property, partners can realize the same profit goals by using a note and security instrument. One partner will hold title to the property and sign a note to the other partner for the amount of the other partner’s cash investment. The note is secured by a mortgage on the property. A second note and mortgage is also executed, which will be a shared equity mortgage. A shared equity mortgage has a payoff that is based on a formula that relates to the increase in value of the property.
Shared equity mortgages (shared appreciation mortgages or participation mortgages) were popular when interest rates were so high that commercial borrowers could not maintain positive cash f low. The lender thus dropped the interest rate in return for a share of the future profits in the borrower’s property. Today, shared equity mortgages are not as popular, but they are still an effective tool for financing properties with people who are open-minded.
