Sweetening the JV deal for 'money partners'

Article Re-posted From Canadian Real Estate Wealth

 A joint venture veteran is offering a creative strategy for keeping money partners from feeling overexposed, pointing to a financing approach that sees the expert partner secure a vendor loan.

“You’ll have one party putting the down-payment down, which is typically 20 per cent to 25 per cent on a commercial property, and the other party brings the experience,” says investor Paul Kondakos. As a result, “you sometimes get a lot of push back from investors who say, ‘I don’t know if this is really fair for me to put all the money down and you’re coming to the table with the experience, but technically no cash.’”

To keep the idea of a joint venture attractive, Kondakos has used some creative financing – a trick investors can use in their own partnerships – to help him bring not only experience but money to the table.

“What I’ve done to mitigate any potential negative feelings is use a VTB to be able to bring some money as well as experience to the table,” he said. “So for a $1 million commercial property, you typically need 25 per cent down, so you need $250,000. Under a traditional JV, the cash partner would come up with that not including closing costs. Under the VTB, typically the VTB is about 10 per cent of the purchase price, or $100,000 in this case, so the cash partner has to come up with significantly less.”

The result?

Both parties are coming up with significant parts of the down payment. According to Kondakos, being able to bring both money and experience to a joint venture can make all the difference, especially to the mindset of the “traditional” money partner, who is often asked to take a minority position in the deal.

“It’s the psychology that they’re not putting in any more than what they normally would,” said Kondakos, who has used JVs to acquire many of his 100-plus doors. “The benefit for me is that because they have to come up with less capital, they’re much more amenable to the JV.”

Comments

[Lance]

Hi,
In what ratio is the equity & Profit sharing divided between the Investor offering expertise & the money partner ?

[Paul Kondakos]

Hi Lance,
The equity created (not including the initial funds from the money partner or VTB) and all profits are divided on a 50/50 basis.