Setting up JV for Real Estate Buy & Holds

[Robert Piller]

I am looking to create a JV for investment in rental singe family houses in a market. I plan to find the properties, actively manage the properties through our management group and use the fund to purchase and rehab the houses.

I plan to raise $1 million per JV. Goal is rental cash flow for 3 years, with the plan to sell the properties (either individually or as a parcel) after year 3 -depending on market conditions.

Since I am doing most of the work - any idea what would be a fair split of ownership management and other fees?

I might want to spin off the management portion, if I end up setting up a JV in a market in another state. How would that affect the ownership, management fees and other fees?

Any other issues I am overlookig or should consider?

Thanks.

[Karen Margrave]

@Robert Piller I have several questions:

• What will one million dollars buy?
• What is your experience?
• You say you will be doing most of the work, exactly what does that mean? Are you physically going to go over and do the rehab, or hire contractors?
• Do you have a contractors or real estate brokers license?
• If your share of the joint venture includes your management, what would you be contributing if you "spin off" the management?

I've never participated in a joint venture before, but know that it is all about giving value to each persons contribution, the trick is in finding what the balance is, and the actual value for each persons work if they're not adding cash.

[Robert Piller]

@Karen Margrave --funny, I am reading one of your blog posts on the subject right ow.

Looking to buy 25-30 Rental units in Detroit or San Antonio market as a start. Avg. cost after repairs for the houses I am looking for is about $30-$40K. So all in for $1 million.

My team has owned over 300 SFR rental units and am part owner of our in-house management team--so I have been at this since the early 1980s. Bought dozens at S&L auctions (if I really want to date myself!!, others from REO's, other investors, on the open market, from wholesalers, etc..and always below retail. Currently have nearly 60+ SFR's free and clear and buying a dozen or so more per year.

Unfortunately, my personal money supply is not endless (way too bad--huh!?!) and I'd rather look at mutltiplying my efforts and using my system over and over again in additional markets without tying up my own funds.

By doing most of the work-- I mean putting everything together--including the selection and purchasing of the properties, working with licensed contractors, overseeing repairs and the house inspections, getting the properties under management, etc.

No, I don't have a contractor's or real estate license as I job that work out. Never been an issue. I am a firm believer in doing what I do best and letting others do what they do best.

The last question is up for debate. Just wasn't sure if I should include my monthly management as part of the equation or as a separate line item.

[David Beard]

So you're setting up mini Buy-to-Rent funds just like the hedge funds are doing. I'd think the ongoing management fees should be consistent with each area's market rates for these services. If you do the work, you earn it. If you outsource the work, then you don't earn it. Hedge funds often charge 2% annual mgmt + 20% of net income/profits. I'm not sure if these B2R funds operate precisely that way or have made material adjustments to this model. @Jake Kucheck works with these funds and can probably provide great advice.

[Karen Margrave]

@Robert Piller That definitely helps fill in some of the blanks. One thing you'll want to know is that here on BP we get people everyday coming on, placing ads, etc. looking for money, partners, etc. The ones that are successful in finding those things are those that are known here, and have answered posts, and participated enough to give people a sense of whether or not they actually know what they're doing, or just hustling. Therefore; giving some details in posts about your experience, and the specifics of the properties, etc. really will help you.

Believe me I know exactly what you mean about having more deals than funds! In fact, I may be advertising for partners, or construction lenders myself. However; in all these years we've ever done a joint venture. However; we are in a new area, and costs are much higher, so have to try new things!

Good luck on your venture. Keep me posted as to the response. Wish we could do houses here for that amount, but a cheap lot is 400,000!

[Robert Piller]

@David ..Good point.

@ Karen.. Thanks for the tip, but I was not in any way looking for investors in my post. I have people coming to me all the time. For years I have turned them down and gone solo. I was just trying to figure out how to structure these deals..and whether they are even worth the hassle.

[Don Konipol]

@Robert Piller , in years prior a $1 million syndication was usually worth the hassle. Now, I am not so sure. Used to be you were pretty save doing an intra state private offering, exempt from Federal regulation. These were in fact regarded by SEC and most states (not California) as just being a private deal between business associates - pretty informal.

Now my gut feel is that with our new overly regulated environment they are being regarded as securities offerings with an exemption status for private offerings - if all i's are dotted and t's are crossed. Big risk on these smaller offerings comes with the potential lawsuits if things go wrong. Juries have been known to render ridiculous verdicts and judgments based on small and rather technical violations of securities code.

The way to mitigate the risk is to have a private placement memorandum, partnership agreement and subscription agreement produced by an experienced law firm, compliant with all requisite Federal and state regulations and "safe harbor" statutes. However, these are quite costly to produce, time consuming to administer and restrictive to use.

My own experience was that a $3 million offering was worth the effort and expense as recently as 2 or 3 years ago. Now my own personal minimum is $10 million. Each individual must first evaluate costs, risks, time, return, etc. and calculate whether a private offering (syndication) is worth it and if so at what level. There are many moving parts to this analysis. There are also many attorneys specializing in this area as well as many turnkey consulting firms willing to do the heavy lifting for a price.

Hope this was helpful.

[Robert Piller]

@ Don, the more I delve into this, the more I tend to agree that I should either go big or stay home. I will look into the three agreements you mentioned and learn about those. Thanks.

[Bryan Hancock]

Small world Robert. Call me tomorrow and I can strategize with you on this some. John B. and I are both interested in something like this and I think we can help you set up the machinery using our contacts. You definitely don't want to use a straight JV for this because you'll quickly run into securities concerns if you want to open your operation up to a wide array of investors; which I'm assuming you will.

From the context of your post I think setting up a series LLC with each series buying a block of properties would probably be something worth investigating.

David's post is spot-on about fees. If you do the work you earn them. If you don't your operating agreement should specify what they're worth and you simply pass these fees on to third parties. If you want to reserve the right to either do them or not do them this should be specified in your operating agreement.

Fees should be set in line with what the market charges for the services you'll render. A good operating agreement will enumerate the possible fees and what they're worth. I can show you some examples with our agreements.

Promoters generally take a position in the waterfall that is subordinate to the "preferred" shares of the straight cash investors. There are many ways to structure splits and to compensate the promoter for value delivered. You really want to structure things so the investors get first crack at distributions and you get much of the upside if you deliver value as a manager. Since you'll presumably be investing your own funds in the series you'd be compensated well as a cash shareholder as well.

There are probably hundreds of other issues you should consider. Liquidation rights, voting, distribution frequency, etc. all need to be considered. I have some literature I can send to you to describe the choices syndicators generally are required to make when setting up their own funds. This will save you money when you hire the securities attorney to draw everything up since the issues will be thought through in advance.

[Bryan Hancock]

Here is a list of things I dug up tonight that need to be considered for financing like this:

·Limitations on the LLC's business activity

·Limitations on the LLC's powers

·Different classes of shares

·Are members obligated to make additional contributions?

·Capital call procedure

·Amount dilution, of shares; If so, method selected

·Vote required to amend articles or operating agreement

·Other voting rights and vote required for approval

·Indemnification of agents

·Meetings

·Quorum required

·Meeting formats

·Certificate of interest

·Election of manager

·Vote to remove

·Will the manager receive compensation?

·Should manager devote full time?

·May manager engage in competing activities?

·Modification of the fiduciary duties of a manager?

·Preferred shares – Allocation of profits and losses

·Preferred shares – Distributions

·Mandatory distributions, if any – Net cash from operations; Timing; Fixed Date; Discretion of managers; Vote of members

·Dissolution

[Karen Margrave]

@Robert Piller

Sorry for the misunderstanding! I see @Bryan Hancock has jumped in, so that's great. I was actually going to @mention him, but I've been dragging him into so many posts lately I felt guilty. All of this is way over anything I've dealt with, so you're in good hands! For my purposes I think a simple joint venture will suffice if we decide to go that route.

[Robert Piller]

@Karen: Thanks. I am working with @ Bryan currently on 2 projects (new builds in Austin) and his wealth of knowledge is much appreciated.

@ Bryan: Thanks for the nuggets. I just sent you a PM. Let's get together and discuss.

[Jake Kucheck]

Two thoughts here:

1) There are only a handful of attorneys in each state who actually know their stuff when it comes to securities law, how to use it to your advantage, what timelines are for processing depending on which exemption you are using, etc. In CA, the Reg D exemption is pretty quick and depending on which subset you use, can actually give you a lot of or very little leeway in your marketing/networking efforts. Conversely, Reg A is the SEC equivalent of a blank check for the most part, but can take up to a year to get processed.

Find these folks, and let them do your heavy lifting for you. And pay for it. Seriously.

2) You are going through all of this to raise $1 MM? Agree with Don that $10 MM is kind of the minimum, although I spoke with an investor today that liked our model but said he wouldn't consider an equity investment in anything less than $100 MM, and wanted to know how quickly I could scale up. Maybe he was posturing, but it's always good to be reminded that we are very, very small fish in the greater scheme of things.

[Robert Piller]

@Jake Kucheck Once I read this thread, I'm now considering $10+ million or nothing.

I now see that for $1 million it is a waste of my time. I can self-finance deals of that size without the regulations and paperwork. It is like that Austin Powers film when he holds the world hostage for a ransom of "$1 million dollars!!"

Anyone know of a great Austin-based real estate attorney with experience in JV or syndication? I'd rather pay them to do the heavy lifting, as you so rightly mention.

[Robert Piller]

@Account Closed I just cannot see how any deal is worth it to do all that work for $400K...unless they wanted to build their portfolio for future projects and just get one syndication deal under their belts.

But even then.... I can't see it. Time is money.

[Jeff Greenberg]

@Robert Piller it depends on what the raise is for. Years back We did had a 350k raise for a 1mil leveraged purchase. Lawyer fees were only 5k so it worked out ok. Certainly that size would not be worth it on an all cash deal.