WS1232: How To Setup A Successful Joint Venture | #Highlights

EPISODE 1232

[INTRODUCTION]

0:00:00.0

Whitney Sewell (WS): This is your Daily Real Estate Syndication Show and I’m your host, Whitney Sewell. Today is a Highlights show that’s packed with value from different guests around a specific topic.

Don’t forget to like and subscribe but also go to LifeBridgeCapital.com where you can sign up to start investing in real estate today. I hope you enjoy the show!

[INTERVIEW 1]

0:00:23

WS: Our guest is Jeff Lerman. Thanks for being on the show again Jeff.

0:00:27

Jeff Lerman (JL): Thank you for having me.

0:00:28

WS: Why is this important for investors to know just about, you know, JV, why is this so important?

0:00:33

JL: Again, of course, we’re going to capitalize this and not go through everything all over again, there’s just a tiered up. It all is under the umbrella of doing deals with other people’s money. What I explained the last time we were together is although we help investors with syndication, what I always explain to them is that why I believe that joint venture is the cheapest, easiest, fastest, and safest way to do deals with other people’s money.

The reason is that what a joint venture means is that, like, if you and I want to do a deal together and if both of us are actively engaged in the management of that deal and if we’re both equally sophisticated in terms of real estate, generally speaking, and if neither one of us is relying on the efforts of the other to make a profit, it really is a collaborative thing. To break it down, it’s as simple as “Hey,” if you and I are buddies and we’re driving down the street, as saying “Hey, that looks like an interesting building, you guys want to buy it?”

We buy it together and we say, “Sure, let’s do that.” You put together an agreement and that is something again that we’re both going to be involved with, that’s not a security because neither one of us is a passive investor. Both of us are going to be active. That’s the difference between a joint venture and syndication. In general, a joint venture costs a fraction of the legal fees that syndication would require and it is a simpler set of documents. It is in my opinion the faster way to do deals because it’s having a conversation and an ongoing relationship with one or two or three joint venture partners, instead of multiple investors that you would have in syndication.

That was why I thought that this was an alternative to syndication that your listeners need to know about, need to understand, and at least consider it the next time they need a deal. And actually don’t wait until you actually have a deal under contract before you start trying to find a joint venture partner. It should be something that investors have always in the back of their minds and when you run into somebody, at a networking event, or somebody who you think might be a good candidate because they have enough wealth to actually help take down, provide all the money you need or at least a good chunk of it.

Start setting up that relationship then so you have that database of potential joint venture partners ready to go and all I got to do is pick up the phone. That’s the – I think the essence of what we covered in the last interview.

0:03:24

WS: Yeah, I think you hit a couple of important points there that are worth saying again, that you’re not relying on the other partner to make the profit, and that you’re both active. Obviously, in syndication, we have limited partners who are completely passive and they are – they’re depending on the general partnership to turn this property over, whatever it is, to go through the business plan and make the return but they don’t play any kind of active role and so that’s why we have to syndicate, that’s why we’re syndicating.

This is such an important topic because it may not always be necessary and that’s why I want the listeners to know about this as well and it’s such an important topic. You know, going-in to thinking about joint ventures, what type of documents do these partners – what are we going to use as far as with partners, to set up disagreement?

0:04:10

JL: I want to answer that but I also want to add one more thing to that last point which is your primary need does not have to be that you need money for your deal in order for a joint venture to make sense. As a matter of fact, there was an article in the Wall Street Journal that was talking about how family offices being defined at least in the journal as a multigenerational ultra-high net worth family that invest in real estate.

The article is saying how the growing trend for family offices is to be doing more joint ventures. Not because they need the money. The money isn’t the reason, they do it to diversify the risk, to partner with somebody who might be a good strategic partner for reasons beyond money, if they want to find a partner who has got the expertise that they don’t have, whatever.

For those listeners who are saying, “Well gee, I don’t really need the money,” even if you’ve got all the money you need, there are a lot of family offices, or just you know, wealthy individuals who joint venture for other reasons which make a lot of sense. Anybody who is listening to this can use a joint venture to solve a lot of problems and get a lot of benefits other than just if you need money. Having said that, to go back to your question, what kind of documents? Let’s contrast this, stay with the contrast for a second between syndication.

0:05:37

WS: I wanted to say too, that document that you’re talking about, it would be great if you share that in the group, I’d love to read that and I’m sure others that are listening would like to as well in the Facebook group.

0:05:45

JL: You mean, the actual document that we use?

0:05:48

WS: No, the Forbes, was it a Forbes –

0:05:50

JL: The article? Yeah, the Wall Street Journal? Yeah, I’ll email it to you right after this, okay?

0:05:56

WS: Yeah, that would be great, and we’ll put it in the group. I’m sure the listeners would like to listen to that and the Real Estate Syndication Show Facebook group. Yeah, go ahead with the documents that those JV partners need to be thinking about.

0:06:06

JL: Generally and typically, if you were doing syndication, let’s say you were doing a Reg D 506(b) accredited investor only offering in syndication, which when I syndicate, that’s all I do, that’s the exemption that I use. I do only accredited investors only, that’s my preference, you can do non-accredited too but my preference – that’s the simplest form of syndication.

If you do that, you’re going to need a PPM, private placement memorandum, which is going to include subscription agreement and all the disclosures and the business description of the business, the real estate, whatever is involved in the actual deal, you have the investor suitability questionnaire, you’ve got all of that and then you’ve got on top of that Form D and registration statements, all of that.

Those are just the typical things that you’re going to have at a minimum. For a joint venture, all you need is one document and if you’re like most joint ventures in the United States today, that one document is going to be LLC, operating agreement, a limited liability comp, you do a limited partnership instead, if you want too, but then, in that case, it’s going to be a limited partnership agreement. Those are the two usual ways to do a joint venture, you could also take a tendency and common agreement and that’s possible to create if you want to do it, we can talk about why that is an alternative.

If you’re going to do a TIC instead, it’s going to be a TIC agreement. It’s only one document, not all those other documents to have to worry about. You can do a joint venture worth a non-accredited investor, you don’t have to worry about all the other things that I just listed before. That’s the document that’s going to be either – one document is going to be one of those documents. A lot easier, a lot simpler.

0:08:04

WS: Yeah, that would be very simple or much more simple, if this makes sense for the type of deal and how you’re partnering with somebody but you know, there’s got to be terms in this agreement, right? How do we reach the best terms with a partner, with a JV partner, how do we discuss those to reach the best terms for everybody?

0:08:20

JL: Great question. So, at the end of our time here together, I’m going to tell your listeners how they can get a much more detailed answer to that question in writing for free that I prepared. I don’t want to spend, we don’t have enough time for me to go through. I have an ebook called 17 Steps To a Successful Joint Venture.

What I thought we should do for purposes of today, is let’s hit on the four or five in my opinion, single most important terms or issues for discussion when you are putting together an agreement with your joint venture partners. Let’s just focus on those.

0:08:58

WS: Sounds good.

0:08:59

JL: One of the first things that we talk about is, what is the best business relationship for us to work together? Let’s use you and me as our hypothetical perspective joint venture partnership and let’s say that my main reason for coming to you is that I need money. Yeah, we could do a joint venture where you could be bringing some or all the money in and whatever but if all you’re doing is bringing the money, we could also have a lender-borrower relationship.

We can cut a deal where we just do a private money loan and that’s how we can get the benefit of our relationship. You can get what you want, which is a return on your investment, not as much as if we were partners theoretically but that’s one way we could work together. The other possibility is to put it together where it’s an active investor and a passive investor. If you really want nothing to do with it. In which case, it would end up being syndication.

It’s a conversation that should take place at the front end to make sure that both parties are comfortable that doing a joint venture, which is going to be different than the other two options, is something that really makes sense for both parties. That’s the first thing that people should be talking about.

The next term – and if you have questions about any of this, jump in, because I was just going to go through these in sequence, okay?

0:10:26

WS: No, it’s important to understand our relationship in this business that we’re embarking on, right? I mean, we’re jumping into this thing. I need to know what your plan is for this partnership and you need to know what mine is as well, or how we’re going to have the best value.

0:10:37

JL: Exactly. Then the next question is, what is the best form of ownership for us? Let’s assume that we have gotten past that first talking point and we say “Yeah, let’s do this, we want to do this and both be actively engaged.” We still have choices to make. One choice which I’ll mention, not because I recommend it but because in case anybody thinks it’s an option. General partnership, you could do a general partnership, I can’t imagine a scenario where a general partnership would ever make sense.

Because in a general partnership, if that’s what you and I did, we would both be individually fully responsible for all of the liabilities of the partnership and there’s no asset protection there, it makes no sense. I can’t remember the last time I did – certainly that I did a general partnership and every general partnership I’ve seen in the last two decades has been a limited partnership.

It would be a limited partnership or a limited liability company. Limited partnership or limited liability company. A limited partnership in a joint venture doesn’t really make much sense because there has to be a general partner and limited partners, it’s an option, but again, it’s difficult for me to imagine a scenario where that made the most sense. That leaves two other options, an LLC or a TIC.

A limited liability company is the most common, most popular way for joint venture partners to do a deal together. A TIC is again, a TIC is common, the main reason partners end up doing a TIC and I’ve done this, I’m doing this with deals I’m involved with now, I’ve done this in the past is when you should have a conversation at the beginning saying “Okay when we exit this and we sell, do we want to have the flexibility to be able to do a 1031 exchange and go our separate ways or stay together?”

No matter how strong the partnership is on day one, it’s not a bad idea to do a TIC, so you do have that ability to go your separate ways, not because there’s a problem in the relationship but for whatever reason. You may have reasons that you want to take the money now, or you might not like the next deal that I find or vice versa. If you want maximum flexibility in a joint venture, a TIC is a way to go in which case again, you’ll end up doing a TIC agreement instead of an LLC.

That’s an important conversation to have upfront and if you don’t have that conversation upfront, you can still start with an LLC and do a TIC later, but it is a hassle to have to change it later and if you are going to change it later, generally, you have to change it at least one year before you sell, otherwise, you cannot do a 1031 exchange.

It’s good to be proactive and forward-thinking and this is the time to have that conversation upfront. 

[INTERVIEW 2]

0:13:44

WS: Our guest is Edna Keep. Thanks for being on the show, Edna.

0:13:47

Edna Keep (EK): Thanks for having me, Whitney

0:13:48

WS: What is the business plan long-term with this deal?

0:13:50

EK: Well, you know, we buy everything long term buy and hold. We’re specialists in that area, love it, we absolutely love mortgage pay down. Right now with our portfolio, we’re over $25,000 a month in mortgage pay downs. That’s like, that takes care of all our long-term stuff that we ever need to think about.

Now, since we’ve got all that in place, we’re just focusing on how we can maximize our cash flow, get our investors paid off as quickly as possible and we really think that Airbnb’ing, not every place is suitable, but Airbnb’ing a lot of units will really help with that.

0:14:22

WS: Nice, okay. As far as you know, I know even your bio mentioned primarily with other people’s money can you tell me, elaborate on how you all used investors, how you’ve partnered with investors, what that looks like. I know you know, in Canada, the syndication model is a little different but how does that work in your business specifically?

0:14:39

EK: Well, generally, we bring our investors in as joint venture partners. They’re silent partners and they – we’ll meet with them once a year, we send reports quarterly, we explain what’s going on and given the option to you know, we told them all about Airbnb in some cases, some aren’t interested, some love them all I know.

We kind of get them a little bit of a say, not a ton, we usually are always the controlling partners in that sense. But sometimes you have to let people get broken a little bit easier but yeah, we used to don’t totally joint ventures, we do a joint venture agreement. When we first started out our joint venture partners were on title and mortgage with us. Now we’re getting to the point where usually only one or two of us have to qualify where the mortgage so we – 

Although they’re on mortgage and title, we’re the ones that were responsible for the mortgage and that sort of thing.

0:15:27

WS: How did you initially start attracting investors to partner with you all?

0:15:31

EK: You know, I used to be a financial adviser and I – when I understood real estate, couldn’t even sell mutual funds anymore, it was just like my gosh, I can’t even believe it, there’s so much more control, so much more money, love real estate, it’s so much easier to understand. I like simple things. A lot of people think that a lot of my clients came with me but you know, they didn’t. I must have done a good job selling them on mutual funds but you know, just basically networking.

We partnered up with somebody very early on who had been in the business about two years longer. They had a bunch of houses and they were actually already raising some capital, I was still a financial advisor when I first started so I couldn’t raise capital. We partnered with them. 

That took a lot of fear out of deals that we might have been scared to do on our own. From there, we just networked and people started coming to us with capital and we get people from all over Canada and US that want to invest in our project, just get to know them over the years.

0:16:30

WS: How do they know about you? How do you I guess start that relationship, you know, people from all over? Is that, through social media, how do you ask that about yourself and what you all are doing?

0:16:39

EK: Well initially it was just personal contacts but eventually email. I do a lot of Facebook lives. I do a lot of podcasts like this and people just get to know us and then sometimes they follow us on Facebook. I’ve had people say, “Yeah, I followed you on Facebook for about two years. I know, we understand your stuff,” and then they start either becoming students or investing with us. We are actually finding right now that a lot of our students are investing with us.

Because you know much like us when we started, we were scared of everything. You know we were scared of making that wrong decision and just having a partner that had already been doing this for two years, took a lot of that fear away. So a lot of our students go, “You know what? If I could be part of a deal, understand it before I start raising my own capital for other deals.” So we do a lot of that as well.

0:17:26

WS: It makes all the difference that’s for sure. It makes all the difference but let us talk about that a little bit. You know you’re coaching others. You have students now that are striving to do what you’re doing right? To build their own business in real estate and what are some of the biggest things that are holding them back from making that leap into doing their own deals? 

0:17:44

EK: You know I think fear is the biggest thing and when they are dealing with investor capital, one of those fears is losing other people’s money and I tell students, you know what? When you tell me when you are scared of losing other people’s money, I like that. I wouldn’t even take you on if you were one of those people that said, “Oh I am not scared of losing other people’s money, whatever it is their money,” right? It is not the attitude I want people to take.

That is more precious than your own because they will help you grow but you got to help them grow at the same time. So that is a big fear getting over that and then you know, getting the mindset of your worth in the deal too. Like so many people think, “Oh if I could just get the money if I could just get the money,” but you know there’s lots of money out there. You are the one with the goal and if you can get that mindset that’s going to make all the difference for you and you know yourself, Whitney —

I mean there is a ton of people out there looking for a place to invest in real estate. They don’t understand it, they don’t know where to start. So they want somebody who knows what they were doing a lot of times. They don’t have time to do it themselves so that is where we come in and we can help. 

[END OF INTERVIEW]

[OUTRO]

0:18:48

Whitney Sewell: Thank you for being a loyal listener of The Real Estate Syndication Show. Please subscribe and like the show. Share with your friends so we can help them as well. Don’t forget to go to LifeBridgeCapital.com where you can sign up and start investing to real estate today. Have a blessed day!

[END]