Note investors - how do you structure your joint ventures?

Question

Do you always do a 50/50 split? Do you consider a lesser split (for your side) for performing notes, since there should be less to manage?

When you send payments to your JV, do you include principal and interest? Or do you include interest only, saving the return of principal until the deal closes?

Bob Malecki · Answer

I provide a 50% split on interest income and any capital gains. We issue quarterly distributions of entire principal and 50% of interest for the quarter. We use a personal property trust with each partner as beneficiaries and the note is assigned to the trust. I usually keep $1-2K for reserves on performing debt and $5K for non performing debt. Here is a simple diagram:

Dan Deppen · Answer

I do 50/50 splits for non-performing notes. For performing I've done partials, and have recently moved to a promissory note similar to what Logan described.

For JV's that are reperforming I'll send the interest split on a quarterly basis. I don't normally send the principal splits until the end but will if the JV wants them. The main reason I don't send them with the interest is that they tend to be small anyway.

But for JV's whether they are paying or not I also send a report every quarter that includes an export of all the Quickbooks data and a current status.

Chad U. · Answer

For larger investors with multiple loans, I do a collateral assignment agreement, along with unrecorded AOM's/allonges in their entity name that are held by the custodian.  I give the investor full access to the collateral, and in the event of default on the JV agreement, the investor has full authority to check out the hard collateral files including the AOM's, etc.

Logan Hassinger · Answer

@Jamie Bateman

We do not use JV agreements. A promissory note with a collateral assignment is how we partner with investors.

Typically a JV agreement is unsecured and if a deal loses money then so does the investor (nothing new there), therefore our investor is looking to lock in a rate of return which pays interest payments along the way.

When it comes to performing notes, it’s strictly a cash flow play, by where we are earning a spread between what we borrow in the form of a promissory note and what we earn on the mortgage note.

The collateral assignment that we attach to the note is incase of default and provides extra security to the promissory note.

Chris Seveney · Answer

@Jamie Bateman

For performing notes I don’t typically do 50/50. I started giving preferred returns then moved to selling them as partials.

In regards to principal and interest - this is a personal choice of returning only interest and using principal to cover any unexpected costs or returning it if you collect an upfront holding cost.

Marco Bario · Answer

For those who offer joint ventures, do you assign the note to the capital partner? If not, what protection does the capital partner have beyond seeking a judgment based on the JV agreement and hoping to be paid on that judgment?

Frank Fiore Jr · Answer

For performing assets we provide a promissory note and a AOC (Assignment of collateral) w/ quarterly interest only payments. JV for non performers are currently a 50/50 split.

Steve Hodgdon · Answer

Last partnership was 70/30 money investor/operator. 50/50 after 7% return threshold.  10% monthly servicing cost off the top.

On the last one off deals I sold front end partials on performers. Lower quality assets giving investor 7 years of 10% interest at less than 50% ITV.

Eric Allen · Answer

@Bob Malecki This is awesome. Thanks! Do you have a promissory note Template?

Jamie Bateman · Answer

Thanks  for your answers so far. It's clear there is more than one way to create a win-win scenario. Pretty interesting topic!

Note investors - how do you structure your joint ventures?

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