I have this partnership gone sour...
Looking for some suggestions on a tricky partnership which started beautifully but gradually going sour.
Almost 2 years ago I came to know this older gentleman. He and his wife had done 4 bungalow conversion projects (adding legal basement unit) and they manage all students tenants by themselves. I ended up hiring him as draftsman for my first project which also is bungalow conversion. I felt he's a honest and knowledgeable guy so we teamed up for 50/50 partnership. We bought a property together and then decided to tear it down and buid a 4 plex (four-bedroom each unit) for student rental. In terms of 50/50 partnership, we didn't have written shareholder agreement on who does what, rather just verbal agreement: whoever can do more in certain area then he should do more. First lesson!
He didn't have money or didn't want to use his own money so I used my fund to secure the property and for the first draw of constructionon, on a 8% term - balloon payment at end.
We contracted out to a builder and finished the construction. During the construction honestly speaking he and his wife contributed more than me in terms of design consultation, construction site visit, change request, interior design and procurement. Especially his wife did all the interior design and procurement for furnishing all the apartments. Mainly from Ikea and the home Depot. Not easy due to covid-19.
At the end of a construction to my surprise my partner threw some large amount invoices at me to cover his and his wife's effort. Ever trip to Ikea or home Depot during the constructionis was billed with hourly rate 50 dollars.
After some back and forth discussions they got what they wanted but the discussions were not very pleasant on both sides.
His wife managed to find all the tenants and then charged surprisingly high rent for the rooms.
My position in terms of going forward property management is that we should shop around and compare the rates with my partner's own companies' rate. If roughly the same, they will get the contract. My partner came up a proposal: one month rent for finding the tenants which is one time charge within 12 months and 7% ongoing monthly fee. I managed to find two reputable companies with lower rate: half the rent for tenant allocation and the 5% monthly fee. My partner refused to accept by saying their past experience with third party management was not good so they didn't want 3rd party management company to do it. They said if I don't like their's then they can manage half (2 units) and I manage two units. So basically it's their way or Highway...I felt that's not an option because the JV owns all the units. How is it possible to do so considering the taxation, the operational cost... After some negotiation they came back with new terms: half month rent for tenant allocation whenever that happens and then still 7% monthly fee, plus company pays all the ads cost...
Last night I got a new invoice from my partner's company: $9275 tenant finding fee, $2516 monthly fee and $2033 ad. cost, for a gross income $35950 his wife collected so far. So the JV now will need to pay his company 13824 total, which is 38.4% of gross income collected. Already 8% on annual project gross income. Not even mention we already knew a few guys will leave around spring time...
What should I do? ?
Should I sucked it up and accept this? Pros: I don't need to do anything. Cons: high cost going forward. I won't be surprised more invoices coming my way.
Or, should I just break the JV? The JV owns the whole building. land transfer tax, re-remortgage... Very costly. But it is one time thing, I don't need to deal with them anymore.
What should I do? Appreciate some suggestions.
Thanks.