Which Profit Structure is More Common/Fair in JVs?

[Nir]

Hi Everyone,

Assuming there are 3 investors in a deal - one active investor and two pasive investors, which of the following structures is more fair or common?

A) Active investor A owns 50% of the property, gets 50% of the net income and manages everything from a to z.
passive investors B and C put the down payment amount required and own 25% of the property each. each passive investor also gets 25% of the net income.

OR

B) active investor A owns 33% of the property, gets 33% of the net income and manages everything from a to z.
passive investors B and C put the down payment amount required and own 33% of the property each.
each passive investor also gets 33% of the net income.

THANKS,
Neil

ps. Thomas and I asked a similar question long time ago. However, this question is more specific assuming we have only 2 options A) or B).

 

[GaryMcGowan]

Your going to get answers like; Whatever you can negotiate between you and your partners. Who does what and what is fair?

To date we have JV Partners on 14 of our properties and they are all 50/50. or as you described in option A

 

[Nir]

QUOTE (GaryMcGowan @ May 9 2010, 02:59 PM) Your going to get answers like; Whatever you can negotiate between you and your partners. Who does what and what is fair?

To date we have JV Partners on 14 of our properties and they are all 50/50. or as you described in option A

Hi Gary,

Please note with one partner option A and B are the really the same. the question is specifically about 3 partners in total - how do you divide the profit then? not sure if you own some of your properties with more than one partner(?) if you do, are you saying you still own 50% and get 50% of the net income?

Thanks.

 

[MikeMcC874]

If you think about it, are you as the active partner going to do less or bring less to the partnership because of the 3rd partner?

I would say you probably have to do marginally more since you will need to be transparent and communicate to 2 people rather that 1. Slightly higher closing maybe?

I think the fact that there are 2 money partners speaks to the fact that neither could do the deal with you alone and you should not need to take less because of that.

Mike

 

[Thomas Beyer]

QUOTE (investmart @ May 9 2010, 12:59 PM) Hi Everyone,

Assuming there are 3 investors in a deal - one active investor and two pasive investors, which of the following structures is more fair or common?

..

ps. Thomas and I asked a similar question long time ago. However, this question is more specific assuming we have only 2 options A) or B).
both are fair and both are common .. do whatever can be agreed upon and what seems to make sense to all parties concerned.

BUT: if 50/50 it doesn`t matter if 1, 2 or 12 investors (incl. your own) .. the money portion gets 50% .. start with that unless major $s are raised (say north of $1M)

Example: you need 100K .. you invest 20K and 2 parties 40K each .. you take 50% for work .. and 20% of 50% i.e. a further 10% for money portion for a 60/20/20 split !

related topic on: 50/50 in a JV – is this fair ?
http://myreinspace.com/public_forums/Real_Estate_Discussion/62-2015-5050__is_this_fair_.html

 

[GaryMcGowan]

QUOTE (investmart @ May 9 2010, 05:53 PM) Hi Gary,

Please note with one partner option A and B are the really the same. the question is specifically about 3 partners in total - how do you divide the profit then? not sure if you own some of your properties with more than one partner(?) if you do, are you saying you still own 50% and get 50% of the net income?

Thanks.

In a three partner scenario we have always kept a 50% ownership and the other two partners have an equal share of the remaining %. In our properties we are the "real estate experts" providing the opportunity to invest. Our partners are cash investors who see a return on their money. They have equal decision making as we do. However they look to us to run the investment on a day to day (month to month) basis.

Our partners see monthly cash flow and equity appreciation based on the % that they own. Eg. if they own 50% of the property they get 50% of the cash flow and the equity. I know that others have other scenarios. We like this method (for now) because it is really easy to understand if you are the investor.
Sometimes the investor wants a specific return. So you would need to see if the return works for you and the property.

 

[Nir]

Thank You Gary, Mike and Thomas for the GREAT input!

Regards,
Neil

 

[Thomas Beyer]

QUOTE (investmart @ May 12 2010, 10:05 AM)
Thank You Gary, Mike and Thomas for the GREAT input!



Regards,

Neil


In a 3 way sharing you may wish to consider an LP too as it allows for flow through of losses to investors to the tune of 100% even if the gain or cash-flow s split 50/25/25 !



See REIN posts here on What is an LP: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-16690-What_is_a_limited_partnership_or_LP_.html

 

[GaryMcGowan]

QUOTE (ThomasBeyer @ May 12 2010, 04:26 PM)
In a 3 way sharing you may wish to consider an LP too as it allows for flow through of losses to investors to the tune of 100% even if the gain or cash-flow s split 50/25/25 !



See REIN posts here on What is an LP: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-16690-What_is_a_limited_partnership_or_LP_.html




That is a great post Thomas. One I think I need to follow up on with regards to how we could use it to our advantage here in Ontario. I know that to invest into a LP with RRSP funds for a Ontario resident the investor has be an acclaimed "Accredited Investor" which has some strict guidelines.

Always looking to add some more tools to the tool belt.

Thanks again for a great post.