Engaging in a partnership for a project

[Phiber]

Hi guys,

So I am looking for a bit of advice/thoughts on an opportunity I am contemplating.
I am thinking of engaging in a partnership with business relation/mate that would look like this:
- we purchase a property on a large block
- get all approvals
- subdivide
- demolish and rebuild 4 townhouses
- sell 2, keep 1 each, in our own name
- exit
- repeat if successful

The goal of the partnership would be to combine our resources to tackle a large project that neither of us can take on his own. He also has contacts for all the tradies, which will help keep the costs under control.

We are on the same page regarding guidelines: 50/50 cost initial cost injection, and 50/50 split of everything else we encounter.

Clear exit strategy: we buy, develop, sell and split. Then each is free to do as he please with his property. No co-ownership long term hold & conflicting regarding whether to sell or hold and whatnot.

I have basically been looking at what type of structure could be put in place to protect both of us. I have done an extensive search on the forum and found several possibilities:

- partnership of individuals
- Joint venture
- trust
- partnership of trust

I have been trying to get a better understanding of the differences and benefits but it's pretty complex. I guess one of the main feature would be the limitation of the liability of each member to the extent of the project only. But my understanding is that personal guarantees are required all along the way...so might not be simple at all.

From what I have read, it is all a big mess and it's much better to do it alone!
I am not opposed to the idea, but lack experience in this area ( I would not know where to start) and also lack the time. In this respect the partnership would prove a very useful guide that could also help me build skills along the way.

Any thoughts and suggestions would be greatly appreciated!
It's only something I have been considering for now and I see the opportunities but also the possible downfalls.

 

[Aaron_C]

Do it alone unless you need the resources to be pooled for servicing/deposit requirements.

 

[Deltaberry]

Yes do it alone if you can, especially project-related exercises.

 

[MRO]

I am about to enter a JV with my sister in law. We will be setting up a unit trust to do this and keep it cleaner and separate from ourselves. I still need to speak to a finance person to see if guarantees would be required.

We will each contribute $100k (purchase of units in trust) then the trust will borrow a further $300k to purchase the development site ($500k total purchase price). The property currently returns around $500 rent per week. I assume we would have enough equity for the bank to forego guarantees. Then we will contribute another $100k each (purchase of further units in trust) to provide some funds toward the $600k development with the hope of getting finance for the balance.

Each 'partner' will be borrowing to contribute their initial $200k but this will be funded using security in their existing properties not in the property being purchased by the trust. If structured properly the interest on these funds will be deductible to each partner.

End result is clear separate and defined ownership in the property, no cross collaterisation on jointly owned property, clear separation for tax/gst reporting.

Owning it yourself is always easier but funding can be difficult when starting out or when tied up in other projects.

 

[Ausprop]

I've done a lot of partnerships, JVs etc over the years and can say that more go wrong than go well. Unless the scale is giving a very compelling reason to join up I would always rather do 1 smaller project than half a larger one.

anyway am sure you will go into it anyway as everyone is friendly and optimistic at the start and hopefully it turns out well.

 

[Terry_w]

I am about to enter a JV with my sister in law. We will be setting up a unit trust to do this and keep it cleaner and separate from ourselves. I still need to speak to a finance person to see if guarantees would be required.

We will each contribute $100k (purchase of units in trust) then the trust will borrow a further $300k to purchase the development site ($500k total purchase price). The property currently returns around $500 rent per week. I assume we would have enough equity for the bank to forego guarantees. Then we will contribute another $100k each (purchase of further units in trust) to provide some funds toward the $600k development with the hope of getting finance for the balance.

Each 'partner' will be borrowing to contribute their initial $200k but this will be funded using security in their existing properties not in the property being purchased by the trust. If structured properly the interest on these funds will be deductible to each partner.

End result is clear separate and defined ownership in the property, no cross collaterisation on jointly owned property, clear separation for tax/gst reporting.

Owning it yourself is always easier but funding can be difficult when starting out or when tied up in other projects.

Many other advantages in using a unit trust too.

But, unfortunately, personal guarantees will be required - from all unit holders.

 

[MRO]

But, unfortunately, personal guarantees will be required - from all unit holders.

Thanks Terry, I was hoping not to hear that but thought it might be the case.

As long as each partner doesn't have to secure against the property I will be happy. Guarantees don't bother me as I am confident in completing the project.

 

[Phiber]

Thanks guys, answers largely anticipated.
The trust structure you have setup seems pretty good. Worth looking into.
I'll keep this stuff in mind.

If I want to go my own way, lots of research required in terms of IDing possible properties that could be elligible for subdivision. Any tips as to which direction to look into?

Cheers guys

 

[Aaron_C]

Just FYI sometimes all unit holders are required to give a guarantee but usually only if they are a substantial unit holders. Otherwise it is not required - just the directors.

I have a JV atm but it currently works because we both have the same / similar financial strength. If I need to put in $10,000 tomorrow, then he has the ability to do the same. It's when there is a significant imbalance does it become a major issue.

 

[Terry_w]

Just FYI sometimes all unit holders are required to give a guarantee but usually only if they are a substantial unit holders. Otherwise it is not required - just the directors.

I have a JV atm but it currently works because we both have the same / similar financial strength. If I need to put in $10,000 tomorrow, then he has the ability to do the same. It's when there is a significant imbalance does it become a major issue.

Good to know Aaron.

This reminds me that many years ago I did a loan for a woman as trustee of a unit trust with her daughter owning all the units - The lender didn't ask for a guarantee from the daughter. I think in this case it was just because they didn't read the deed or my notes.