Pros and Cons of a partnership

[Prop_Perspectiv]

Not sure if this is the right part of the forum.

Looking at establishing a partnership with my sister and her partner and wanting to nut out the pros and cons.

As far as I can see, pros are:

Increased borrowing power - deposit and wages.
Spread out workload (in the case of reno's and finding properties).

Cons:

Spread out profits!

What else am I missing?

Would you ever consider an ongoing partnership (as in not just a JV for a specific project). Why, why not?

 

[MRO]

It gets difficult to use the property as security for other loans.

Once you build some equity you might want to use this to buy more. If you are not buying with your partners then you probably cant use the equity to help purchase the next one.

A formal plan would be good to set up. How long will you own it for, what is your plan regarding renovation/development, what happens if one of the partners needs to sell?

 

[Peter_Tersteeg]

Don't underestimate the power of the increased borrowing power. This can be a huge advantage.

Pros:
* Putting your heads together will often generate better results.

Cons
* (Finance wise) it will make it much harder to do things on your own in the future.
* Very messy to untie if you decide to split.
* You need to make sure you're both on the same track.
* If one member of the partnership gets into financial difficultly it can drag everyone down.

My suggesting would be to work separately and get as far as you can as individuals. Then join into a partnership and you can see where that takes you. This way you can also look at what the other had done and use that info to assess if your sister is the sort of person you want to be in partnership with.

 

[Aaron_C]

I think Peter's last bit of advice is good one - particularly when family is involved. If your co-borrower/partner is your spouse - then it's less of an issue because presumably all your finances are tied together anyway. Once family is involved you need to make sure that all legal avenues are considered and treat it as business.

 

[geoffw]

Cons
* (Finance wise) it will make it much harder to do things on your own in the future.

Expanding on this. Two people obtaining a loan together are "jointly and separately liable" for the loan. So if one defaults, the other has to cough up.

Even if the other person pays up, it means that for further loans, both you and your partner are assessed for loan purposes as having taken out the full loan by yourself.

My daughter, in a similar situation as a tenant, was one of several people as a tenant on a lease. When one of the other people defaulted, I had to pay their share of the rent.

 

[Peter_Tersteeg]

Spot on Geoff, another example is when you want to do something on your own, your joint debts will be considered 100% yours, but they may only take 50% of the joint income.

This is why I suggest to get as far as you can on your own, then use a partnership to get over a 'serviceability hump'.

Partnerships also work very well for short to medium term deals with a clear exit strategy.

 

[Prop_Perspectiv]

Thanks for all the replies!

Geoff - that is a worry, seeing as the income will only be half of what it would be if we had the entire loan ourselves.

PT Bear - it is the servicability hump that we are dealing with.

Had a meeting with them both last night. If we choose to go ahead with this we will run it like a business, set up a trust and take each property as it comes - reassesing each time. We all have long and short term goals (which differ due to individual circumstances) but share the fundamental mind frame that is necessary for this sort of work. Risk profiles are the same etc.

For me, it is balancing the cons with the stagnation of our strategy.

Looks like we will move ahead in partnership for now. Next step - trust set up!

 

[saibaba]

Trust

I am also in similiar situation.

What kind of property trust need to be setup?

 

[Peter_Tersteeg]

What kind of property trust need to be setup?

You don't actually need to set up a trust for a partnership arrangement although there are substantial advantages. In many respects a husband and wife purchasing a property is a partnership.

In 4/5 cases, a discressionary trust works very well, but you should get professional advice specific to your needs. It's not something you want to muck up.

 

[willair]

Not sure if this is the right part of the forum.

Looking at establishing a partnership with my sister and her partner and wanting to nut out the pros and cons.

As far as I can see, pros are:

Increased borrowing power - deposit and wages.
Spread out workload (in the case of reno's and finding properties).

Cons:

Spread out profits!

What else am I missing?

Would you ever consider an ongoing partnership (as in not just a JV for a specific project). Why, why not?

Some work some don't ,,but from what I have seen between family and their partners if you start with a rock solid no-in-betweens exit clause that everyone inline understands from the start it helps,and everyone has to understand the ATO'S part of the plan also ,,and the way tradepeople work and the different mindsets between the trades,it's hard enough to have a partnership with the one you wake up next too at 4 in the morning..

 

[spludgey]

Personally I wouldn't enter into a partnership, just because I like being able to make all the decisions and wouldn't like to rely on another person's whims.

 

[Millions]

In 4/5 cases, a discressionary trust works very well, but you should get professional advice specific to your needs. It's not something you want to muck up.

A discretionary trust arrangement with a corporate trustee is great if you are certain that you will not have any trading/income losses on the property. The downside to a trust structure is that losses can not be distributed. eg: If you had a -CF property that lost say $100 per week net then you would lose $5,200 in deductions that you might otherwise have with borrowings in a personal name or company.

One other option (and something I have recently used myself for a 3-way JV) is a partnership of trusts with a custodian company or manager. The benefit of this is that if you have your discretionary trust as one of the partners then you may be able to offset the losses from the new venture with any other profits that already existing within the discretionary trust which has your existing properties (and hopefully some profits) in it.

This is something that can't be done if you have a discretionary trust being the asset owning entity as the losses can't be passed down any further than the entity itself which presumably only has one property and no other income (as you are looking at this for the first JV).

Not sure if the above is clear, but happy to expand if anyone has any queries.

 

[Terry_w]

A discretionary trust arrangement with a corporate trustee is great if you are certain that you will not have any trading/income losses on the property. The downside to a trust structure is that losses can not be distributed. eg: If you had a -CF property that lost say $100 per week net then you would lose $5,200 in deductions that you might otherwise have with borrowings in a personal name or company.

The trouble with this is the discretion of the trustee - no fixed entitlements.

Partnership of trusts or, possibly better, a unit trust with each units owned by each person or their own entity of choice - may be better.

 

[Blurbman]

I would recommend that you each go and get independant legal advice. That is, your sister & husband see one solicitor, and you see a totally different one. That way there will be no issue as not having been told of the risks beforehand.

There are no more fiercely argued disputes than ones between family members.

Example is, what if your sister splits up, and she needs to sell everything quickly in a settlement.

 

[Millions]

The trouble with this is the discretion of the trustee - no fixed entitlements.

Partnership of trusts or, possibly better, a unit trust with each units owned by each person or their own entity of choice - may be better.

Hi Terry,

Just wondering in which situation a unit trust with say 50/50 shareholding would be better than a partnership of trusts with 50/50 ownership and a custodian entity managing the partnership. Obviously the set up costs with a partnership of trusts are greater, but are there any other downsides?

Being able to have losses in a trust where you may be able to add in share dividends or some other income to offset the loss seems like a big advantage and I was just wondering if there were any downsides?

Cheers.

 

[Terry_w]

Hi Terry,

Just wondering in which situation a unit trust with say 50/50 shareholding would be better than a partnership of trusts with 50/50 ownership and a custodian entity managing the partnership. Obviously the set up costs with a partnership of trusts are greater, but are there any other downsides?

Being able to have losses in a trust where you may be able to add in share dividends or some other income to offset the loss seems like a big advantage and I was just wondering if there were any downsides?

Cheers.

Just think of 2 examples:
1. Stamp duty on one partner wanting out

cheaper to transfer units of a unit trust (nil in some states) than pay stamp duty on the transfer of the property itself

2. Ability to sell units to a SMSF later on
Can't transfer residential property from a DT to a SMSF, but it may be possible to transfer units in a unit trust which owns residential property.

 

[Millions]

Hi Terry,

If the unit trust was set up say 50(A)/25(B)/25(C) shareholdings and C wanted to sell their ownership to A and B, would stamp duty be payable on the transfer of the 25 shares (and therefore 25% of the asset value) or would it not be payable at all? (in Victoria for this example).

Also, with the partnership of trusts if C wanted to sell their share to A and B would stamp duty be payable on the full asset value, 25% of the value, or some other amount?

Lastly, is there any benefit with having a partnership of trusts versus a unit trust with discretionary trusts as unit holders when it comes to a large capital gain say several years down the track on disposal of an asset?

Thanks again, you've been a big help so far.

 

[Terry_w]

Hi Terry,

If the unit trust was set up say 50(A)/25(B)/25(C) shareholdings and C wanted to sell their ownership to A and B, would stamp duty be payable on the transfer of the 25 shares (and therefore 25% of the asset value) or would it not be payable at all? (in Victoria for this example).

Also, with the partnership of trusts if C wanted to sell their share to A and B would stamp duty be payable on the full asset value, 25% of the value, or some other amount?

Lastly, is there any benefit with having a partnership of trusts versus a unit trust with discretionary trusts as unit holders when it comes to a large capital gain say several years down the track on disposal of an asset?

Thanks again, you've been a big help so far.

In Vic I believe a transfer of units of a unit trust may be exempt from stamp duty - check though. In NSW it would be 0.6% of the value of the units transferred.

If transferring ownership of property it would be stamp duty based on the value of the transferred portion.

And with trusts the capital gains flows through to the beneficiaries or unit holders who pay the tax. There are small business concessions which may be able to be applied in certain circumstances. Off the top of my head I am sure if there would be any differences between the 2.

 

[Millions]

In Vic I believe a transfer of units of a unit trust may be exempt from stamp duty - check though. In NSW it would be 0.6% of the value of the units transferred.

If transferring ownership of property it would be stamp duty based on the value of the transferred portion.

And with trusts the capital gains flows through to the beneficiaries or unit holders who pay the tax. There are small business concessions which may be able to be applied in certain circumstances. Off the top of my head I am sure if there would be any differences between the 2.

Thanks Terry,

So just to clarify your first point, If we had a partnership of trusts which owned a property worth say $2m, and one of the partners who owned 25% wanted to sell his share to the other two partners, can we simply acquire this share and pay stamp duty on 25% of the property value, or are we going to get into trouble with the whole partnership needing to be retired and a new partnership established with one less partner (therefore requiring us to transfer the asset to a new partnership and pay stamp duty on the full amount).

Sorry for the long sentence... it's getting late

 

[Terry_w]

Thanks Terry,

So just to clarify your first point, If we had a partnership of trusts which owned a property worth say $2m, and one of the partners who owned 25% wanted to sell his share to the other two partners, can we simply acquire this share and pay stamp duty on 25% of the property value, or are we going to get into trouble with the whole partnership needing to be retired and a new partnership established with one less partner (therefore requiring us to transfer the asset to a new partnership and pay stamp duty on the full amount).

Sorry for the long sentence... it's getting late

The 2 trustees of the 2 trusts would be legal owners as Tenants in Common so if 1 trustee were to sell their share to the other stamp duty would be payable on 50% of the value of the property = $1mil.

if they held it 60% / 40% and 40% was transferred then stamp duty would be based on $800,000 transfer value.

I should add that there are also land rich provisions which may apply to acquiring shares in a private company or a unit trust which owns land above a certain value - there could be different stamp duty treatment.

So make sure you get advice on something like this as a $2mil property could mean the trust is land rich.