-ve geared commercial joint venture

[jon2378]

Hey guys,

I'm looking to go in with 2 other parties on a commercial property, but I don't know how to structure the loan.

I don't have the resources to go it alone, neither do the other parties. Normally a family trust would be the way to go, but the property is negatively geared by ~40k/yr and we need to use that loss to reduce personal income tax, which a trust doesn't allow to my knowledge.

Buying it under a joint commercial bank loan (70% LVR) under all 3 names will effect our individual borrowing capacities, and make us very co-dependent, which we'd prefer to avoid. At the moment, this seems it might be the only available option?

Our financial positions: I'm investing with a very modest income. The other people involved; one has approx 1.5mil in equity in 2 properties but very low cashflow <50k, and the other person is on approx 130k salary with no property.

All parties are open-minded, and the partner with 1.5mil equity is prepared to secure loan against ones of his properties if required. We're all looking to invest in further property in the next 3-5 years.

Any advice would be appreciated.

Jon

 

[Rolf Latham]

dont

would be my primary comment.

Unless your JV folks are very like minded family and you have an equal exit strategy ( which looks to be hard to achieve) id leave this way alone.

The joint and several issues will mostly come and haunt you for while you have this liability.

While there are some lenders that will ignore a properly structured liability ( and the asset and the income) most wont.

ta
rolf

 

[Aaron_C]

This is a dicey one, why is the cashflow so negative?

 

[nhg]

Umm, okay a unit trust would allow the tax benefits. However $40k -ve/year. What is the point of this purchase?

Doesn't sound like there is any sort of short-term exit strategy. It would be a nightmare.

 

[Terry_w]

Hey guys,

I'm looking to go in with 2 other parties on a commercial property, but I don't know how to structure the loan.

I don't have the resources to go it alone, neither do the other parties. Normally a family trust would be the way to go, but the property is negatively geared by ~40k/yr and we need to use that loss to reduce personal income tax, which a trust doesn't allow to my knowledge.

Buying it under a joint commercial bank loan (70% LVR) under all 3 names will effect our individual borrowing capacities, and make us very co-dependent, which we'd prefer to avoid. At the moment, this seems it might be the only available option?

Our financial positions: I'm investing with a very modest income. The other people involved; one has approx 1.5mil in equity in 2 properties but very low cashflow <50k, and the other person is on approx 130k salary with no property.

All parties are open-minded, and the partner with 1.5mil equity is prepared to secure loan against ones of his properties if required. We're all looking to invest in further property in the next 3-5 years.

Any advice would be appreciated.

Jon

It would be rare for a commercial property to be purchased in individual names - for obvious reasons.

You need specialist legal advice on what structure and then further advice on how to structure the structure. Think inter intity loans as well.

You then need credit advice the viability of the structure from a lending and servicing point of view. You need to know who will be required to give guarantees, how will be affect servicebability now and in the future for the individuals going forward.

BTW even if you have a loss in one entity you can negative gear, indirectly, by diverting funds from the trading entity to the loss holding entity.

 

[pinkboy]

but the property is negatively geared by ~40k/yr and we need to use that loss to reduce personal income tax

Is this your sole purpose for buying the CIP? You sound like you are trying to 'buy' a loss. You should be purchasing to make $$$, especially CIP.

I agree with Rolf, the 3 partners look to be in varying stages of investing careers, and this in turn will create problems as each partners exit strategy changes.

pinkboy

 

[jon2378]

Thanks for the responses so far. The cashflow is very negative intentionally. It would be purchased as a temporary liability, but with conversion from commercial to residential in the next 2 years, I think there's a lot of potential for capital growth.

The breakdown is roughly:
35k/yr interest
10k/yr property management/maintenance
10k/yr depreciation
15k/yr rent

The company renting it is able to employ a partners spouse in their business, so we don't mind giving them cheap rent because of that.

Exit strategy: The two low net worth partners would buy the high wealth (1.5mil) partner out after 2 years.
The purpose of the high wealth partner (who is a family member) being involved is to provide financial backing. For the two low net worth partners, the idea is to buy a liability to offset the partner on 130k's tax, indirectly redistributing the taxable income to his spouse who is employed by the company. Ideally, property would for the interest of tax, be 99% owned by the partner with 130k income, so that all expenses would offset his taxable income, rather than the low income of the other partners.

Another consideration here is avoiding paying stamp duty to transfer ownership of the property. If the property is bought in all 3 partners names, can the other partners eventually just be removed from the title without paying stamp duty, although they would be liable for capital gains tax on any profits/loss? Is there any other way to avoid paying stamp duty on transferring property?

 

[Terry_w]

Another consideration here is avoiding paying stamp duty to transfer ownership of the property. If the property is bought in all 3 partners names, can the other partners eventually just be removed from the title without paying stamp duty, although they would be liable for capital gains tax on any profits/loss? Is there any other way to avoid paying stamp duty on transferring property?

Not easy to avoid stamp duty. One strategy is to die - but this is not recommended. Divorce is another one - not recommended you marry business partners just to avoid stamp duty.

If you had a unit trust on the other hand... tranfer of units could be exempt depending on the state and the structure.

 

[Archer]

Most sates (maybe not TAS - think they still have Land Rich duty which is slightly different) have Landholder duty which generally kicks in if you transfer 50% or more of the units or shares in U/T or coy and that entity holds land in that state worth more than $1m in some states and $2m in others.

There are also provisions within the legislation to tax additional acquisitions once the 50% threshold has been breached ie a move from 50 to 55% also attracts duty.

There are variations within individual jurisdictions but that's the thrust of it, so I guess the upshot is if the property is worth in the millions you wont be able to avoid duty by transferring units in the unit trust. Especially if it can be deemed that various parties are acting in concert then their individual ownerships can be grouped together for the 50% test.

It can be a complicated area so it would be worthwhile seeking advice if you are considering this course of action with a valuable property.