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What is a joint venture agreement?
Joint Venture – Two or more individuals or businesses joining forces for specified project(s).
- Examples Include:
- Co-Wholesaling – A wholesaler helps another wholesaler find a buyer for a split of the profit.
- Fix and Flip – Experienced rehabber and cash partner. Where a rehabber contributed her knowledge and manages the project. Cash partner puts up the cash.
- Landlords – Lease option to tenants. Split the rent money. Split the money from the sale of the property.
How To Structure a Joint Venture Agreement – The Possibilities are Endless!
- Jointly owned Corporation or group of Corporations
- General or Limited Partnership
- A Limited Liability Company
- Contractual – (With a Contract)
Contractual Example – Co-Wholesaling
Wholesaler A gets a property under contract and needs help finding a buyer. Wholesaler A enters into a JV contract with Wholesaler B. Wholesaler B markets the property finds a buyer for wholesaler A. Wholesaler A assigns his contract to Rehabber C.
How Co-wholesaler Funds Are Distributed
Rehabber C pays Wholesaler A upfront. Wholesaler A then writes wholesaler B check for 5k and sends him a 1099.
Title company may split assignment fee at closing according to JV agreement and give wholesaler A and B 5k each. Talk to your title company or title attorney beforehand to see if they are cool with this.
- Co-wholesaler B should definitely get a JV agreement before connecting wholesaler A and Rehabber C.
- Co-wholesale with people with integrity that will write you the check afterward.
- Should be restricted to the marketing and sale of the property
- Should include the property address
- Should include the Fee Split
Joint Venture Agreement For Wholesalers
LLC Example – The Co-fix, Hold and Flip! Using a Manager-Managed LLC
Investor D is super real estate savvy, but does not have any cash. Cash partner E does not know anything about real estate investing but has lots of cash. Rehabber D and Cash Partner E create a manager-managed LLC where Rehabber D manages the day-to-day activities, and Cash partner E puts up 100% capital. They buy a property, fix it up, rent it out, and then sell it, and split all the profits 50/50.
Other Manager-managed LLC Examples
- Manager puts up money. Cash partner puts up money. They split the profit 60/40.
- Manager puts up no money and finds two cash partners. They split the profit 40/30/30.
What a Member-Managed LLC Operating Agreement Should Include
- Each partner’s roles, responsibilities, and contributions
- Should be restricted to the fixing and flipping, (or buying and holding) of the property
- How Profits and Losses are Split
- How will accounting/book keeping be done
- Exit strategy – when does it end? How does it end?
- The Simpler The Structure The Better!
- And more!
Other Examples of JV Agreements
Experienced Investor F enters into a jv agreement with experienced investor G. They create a member-managed llc in which they equally put up cash, manage the day to day responsibilities, and split the profits and losses 50/50.
Mentorship JV Agreement – Jedi Investor H enters into a JV agreement with Padawan Investor I to do three deals. Padawan Investor I agrees to find the deals and to put up money. Jedi Investor H puts up his knowledge and experience for 50% of the deal. Padawan Investor I takes title to the property. Padawan Investor I cuts Jedi Investor H a check after each deal
When structuring real estate joint ventures be careful to not accidentally create a securities offering
An real estate investment deal may be deemend a security when a cash partner: (1) Puts up cash (2) expects profit (3) and has little to no control over the operation. AKA silent cash partners.
Generally, deals should be structured so that the Managing Partner does not have unlimited control.
The cash partner should have a meaningful degree of control. Doesn’t have to have control over day to day activities, but should be able to vote on significant decisions, such as whether to buy or sell an asset, borrow money, etc.
When structuring deals with multiple cash partners if you have 10 or more it’s probably a security and you should consider structuring your deal as a securities offering. . If you have 5-9 it might be considered a securities offering. This is because, with each cash additional cash investor, the decision making power of each cash partner is further diluted. Too many and it is considered that the cash partners do not have enough meaningful control.
If you have to do a securities offering, by all means, go for it! Raise money for your large commercial multi-million dollar deal. That is an entirely different presentation on securities offerings for real estate investors.
Three Ways To Get a JV Agreement
- DIY Do it yourself – Cheapest, most risky.
- Use the same Attorney – Split fees, both parties must sign a conflict of interest waiver, have an attorney draft it according to both parties wishes. Better than DIY.
- Attorney-Negotiated (recommended) – Your attorney negotiate with the other sides attorney. Recommended, but most expensive.
Need a Joint Venture Agreement For Real Estate Investors in MD or DC?
Whether you’re a wholesaler, rehabber, landlord, or cash partner. Contract The Pendergraft Firm, LLC. to help structure your next JV agreement.