“Industry standards” in the note industry & JV partnerships

1 Reply

Hello all BP members,

I was looking to get some opinions/ ideas on what a few industry standards are in the note space. I am currently looking at working with a particular company in the NPL 2nd space. They offer a mentorship program that, on the surface seems reasonable. I know I have to talk with them about their programs actual details, but my questions are more so along the lines if these terms are normal for the industry.

With a JV partner agreement (I realize these are all different):

- Is it normal for the "new" JV partner to be an independent contractor and not an actual JV partner?

- Assuming a workout is reached with a borrower and the note is held to maturity, how long does a 50/50 split last for? In terms of “X” number of years, percentage, dollar amount paid to “knowledge partner”, or for the entirety of the loan, or ?????

- From my knowledge base a 50/50 split is pretty normal. The “new partner” funds the deal and the “knowledge partner” works with and teaches the “new partner” how to work the deal and teaches them things to look out for. The “knowledge partner” is then compensated 50/50. If the “new partner” purchases a 2nd NPL for $15,000, they two partners work the deal for a year, get it re-performing and sell it for $40,000. Is the $25,000 split 50/50 or is the $40,000 split 50/50. I would think that the normal practice would be to split the profits (minus the normal expenses) to be split 50/50, not the initial investment as well. I ask this because the contract states that “Any proceeds from such sale(s) will be split equally between” “new partner” and “knowledge partner”. With my limited knowledge base on this detail, the proceeds would mean the full $40,000. I would assume they would have said profits if they were referring to the $25,000. Am I wrong on the definition of what proceeds are in this case?

- Does anyone have any good or bad experiences with any company who does JV and mentorship for NPL 2nds. If so who was it and what was your experience?

- How does the taxes work if the “new partner” is an independent contractor and purchases the note, the interest income is then split 50/50. The “new partner” pays the “knowledge partner” and then does a 1099 at the end of the year to the “knowledge partner”. Is the “new partner” 100% responsible for all interest income taxes and then after that they pay with post taxed dollars the 50% to the “knowledge partner”? Or is the 50/50 split used with pre-taxed dollars and both partners pay their respected interest income taxes on their own split?

- Does anyone have a CPA recommendation for note related information?

- Does anyone have a lawyer recommendation for reviewing a JV partner agreement in the note space (particularly in seconds if possible) and/ or the approximate cost for them to review it?

Sorry about the long post. Thank you all in advance for those that are willing to share their knowledge and answers.

@Pete S. For our JV deals in which the "Capital Investor" provides the capital to purchase the note, pay remittances, and rehab costs and we are the "Knowledge/Access" partner, the capital investor gets paid back all of his costs first before we split profits. In your example in which you buy a note for $15k and sell for $40k, the capital would get their $15k first before both of us split the remaining $25k in profit. In reality, you'll incur one time acquisition costs (BPO, O&E, DD, potentially REO rehab) and ongoing costs (servicing, FC fees, advances, FPI, etc) minus any income.

I've read that some investors will 1099 their partners but I've read others that say that it's not required. We do not 1099 our partners and have language in our JV Agreement that states that their tax liability is their responsibility. We clearly indicate where every cent goes in our accounting and are comfortable in explaining our books if we had to.

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