Multi Partnership development

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From: Bozo .


Hi,

Great Forum, great to see it still going strong.

I'm looking at purchasing a block of land and building a large house on it. The block of land is Brisbane bayside waterfront (so is pretty costly). I've a group of like minded friends all interested in being involved in the project, six in total (first time at doing this, so it's going to be a BIG learning process!).

Figures are something like:
Land: $400K
House: $300K

I've spoken to a guy at a bank in regard to the borrowing process. Loan approval isn't a problem, however... I asked him about the impact on future borrowings. His remarks indicated that as we would be borrowing $700K, and each person individually guaranteeing the loan, we would each be joint and separately liable for the total loan amount. I guess this means that if 3 people skip the country and can't be found, the remaining 3 are responsible for the repayments. Which means if I approach them to borrow for another IP in 12 months time, they'll assess my debt level and liability at $700K as opposed to my 1/6 share of it. Hardly fair I think.

I haven't shopped around yet, but the guy seemed to indicate this was common practice. Will have to do some further research... in the meantime, has anyone got any ideas on how we might be able to structure this to enable future borrowing?

 

[michaelg]

Reply: 1
From: Michael G


Hi,

I've taken a loan out with ANZ through a trust/company trustee and boy am I hooked every which way.

Yeah, your liability seems to be pretty similar to a partnership agreement.

If you're the last person standing then yes, you'ld be liable for all debts, nasty huh?

Even if funds are pooled into a trust, the trustee would still be taking liability.

Might be worth spending a little more time working out the finer points of liability and structure - if the deal sours this will be time well spent.

Also you may want to consider what you own. If you have nothing, then nothing can be taken from you, then the creditors will go chasing someone else.

And something which is becoming more apparent to me everyday, work out your exit strategies. i.e. what do you do when things go bad, or people pull out?

Basically you need a decent partnership agreement.

Michael G

 

[WebBoard]

Reply: 1.1
From: Steve Piggott


well this is a common scenario when taking on larger projects. Your best bet is to put together a unit trust with a corporate trustee. The unit trust will hold the property and have 60 units split 6 ways so 10 units per investor. The trustee will be a $2 company and have no assets. This makes the director/s at arms length so no legal action can be taken. The 6 investors will each be equally liable through the unit trust. This is a similar structure to what I am currently employing for a $4 mill. development.
Please check this out with a qualified corporate lawyer.

Happy investing Neb

 

[michaelg]

Reply: 1.1.1
From: Michael G


Steve,

I imagine the banks still want someone to sign personal guarantees, who would do this?, I assume the directors of the trustee co. would be responsible?

If this is the case, then any/all Directors are going to be jointly/severally liable for the loans?

Basically I would be interested to learn who signs the guarantees in your structure. The basic assumption I'm making here that each project structure is treated as a new entity with no previously trading history and thus does not stand on its own two feet, which means the lenders wants a REAL person to sign the guarantees.

Interested to hear back on this one, something I'm interested to know more about.

Michael G.

 

[WebBoard]

Reply: 1.1.1.1
From: Bozo .


Thanks for the previous replies.

I had a chat with an accountant this morning. He suggested two options. A unit trust or a company, with a preference for the company. With the company option, each of the six parties would be shareholders and would take out individual loans for their portion of the total amount. Then the company has no debt, just a $700K pot of money injected by shareholders (I think the company would still have to guarantee the loan though?). I guess a similar structure would apply for the trust.

So it sounds like Steve is on the ball...!! Thanks for the advice.

B

 

[WebBoard]

Reply: 1.1.1.1.1
From: Brenton G



Hello,
Just a thought from a beginner. I have heard of something called a
no re-recourse loan. It it where the deal itself is good enough to stand on
its own two feet with the banks. No guarantees given. From what I have been
told you need to be able to demonstrate a level of experience in the
development area so you might not be able to do this type of financing from
day one.

Has anyone out there got some more iorformation about this?

Regards
Brenton

----- Original Message -----
From: "propertyforum Listmanager" <[email protected]>
To: <Recipients of 'propertyforum' suppressed>
Sent: Saturday, January 05, 2002 2:14 PM
Subject: Multi Partnership development


> From: "Bozo ." <[email protected]>
>
> Thanks for the previous replies.
>
> I had a chat with an accountant this morning. He suggested two options.
A unit trust or a company, with a preference for the company. With the
company option, each of the six parties would be shareholders and would take
out individual loans for their portion of the total amount. Then the
company has no debt, just a $700K pot of money injected by shareholders (I
think the company would still have to guarantee the loan though?). I guess
a similar structure would apply for the trust.
>
> So it sounds like Steve is on the ball...!! Thanks for the advice.
>
> B
>
>
>
> To reply: mailto[email protected]
> To start a new topic: mailto[email protected]
> To login: http://bne003w.webcentral.com.au:80/~wb013
>
>

 

[WebBoard]

Reply: 1.1.1.2
From: Steve Piggott


Ok folks with development scenarios there is a way where you can use *asset lending*.
This is basically where the funds required to build the project are secured against the project valuation at anywhere from 60% to 75% LVR. Yes Michael there was a time where i was signing guarantees after guarantees and it all seemed a bit pointless when if the project failed there was no plausible way of myself covering the repayments , let alone the millions of debt. The banks of course know that DSR only applies where they themselves are exposed to the general mortgage risk, which accounts for the most part of the banks risk. In larger scale developments, residential or commercial, the banks have a different set of rules... and the rules are flexible and can be modified to suit the project. So in response to your inquiry on guarantees... I now have legal agreements structured for each project that detail our involvement and responsibilities.
They are a form of guarantee... but my risk is only the development and the banks can easily complete the project if I cannot.
Non-recourse lending is the term used now for asset lending. If the deal stands up then the banks will lend against the strength of the deal.

hope this clarifies a couple of things

Happy Investing Neb

 

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Reply: 1.1.1.2.1
From: Dave


Well summarised, Neb!

Some companies, however, lend far higher. Normally I'd post this in Caveat Emptor, but, being relevant to this thread, I thought I'd continue.

I'm a director of a commercial lending company, exclusively representing a primary lender. (Primary lenders lend to countries and major banks...such as our big four)

I can provide finance up to 90% of end project valuation, zero pre-sales, and 1.5% equity contribution. Interest rate @ 7.2% fixed. Until only recently, the minimum lend using this facility was $100 Mill (USD). It's now $3M (AUD).

As you say, it's non-recourse and the funding is approved purely on the viability of the project itself. Many people who thought they needed equity partners are now parting ways with them because they no longer need such a substantial equity contribution to kickstart an otherwise very strong development.

Cheers,

Dave