- Michelle_2Member@michelle_2Join Date: 2003Post Count: 2
I was hoping someone could give me some advice on starting a property syndicate. Myself and a good friend are looking at property investing together. As we will pool our resources we want to set up an arrangement that will protect both partners in case of any future problems eg any personal debts or divorces etc. Any feedback would be appreciated.
Thanks ShellymelbearMember@melbearJoin Date: 2003Post Count: 2,429
Hi Shelly and welcome to the forum.
If you are looking at buying something together, my preference would be to set up a unit trust which would purchase the property. You can allocate the shares in any proportion – you basically ‘buy’ them, a lot like a company.
You can also set up your agreements as to what happens if one wants out etc. etc. In all things, talk to your advisors, and outlay any concerns you have. Now, while you are friends, is the best time to come up with all the what if scenarios, especially the one where you suddenly hate each other.
You also need to set out what happens if something breaks – do you repair/replace/get three quotes/take the first etc. etc. How will it be paid? I’ve seen this sort of situation bickered about between the partners, while the poor tenant is sitting at home with no hot water.
Hi Shelly, welcome to the forum.
I posted a detailed reply to a similar question a few months back. Here’s the link:
As you can see from reading that post, there are quite a few issues that you need to seriously think about. Sure it’s a good friend, but that doesn’t necessarily mean you have the same views and ideas on particular matters.
For example, 2 of my best friends are avid property investors/developers, but I’ve never been able to get into a joint venture with them. That’s because while we all talk about property development, we’ve got very different approaches on how to do it.
And now’s the best time to put all these things in writing, when everyone is happy and wants to work together – NOT when a disagreement arises.
And if you’ve worked out all these issues, and go to a lawyer to draw up the terms of the JV/syndicate, it’ll be a heck of a lot cheaper than having the lawyer walk you through each issue.
melbear’s suggestion of a unit trust is a good one. From a legal perspective, it’s the most flexible vehicle, especially in terms of exiting your investment. However, you do need to get some taxation advice on what’s the most appropriate vehicle for your circumstances, since different structures may result in different tax treatments.
But one structure that I’d suggest you DO NOT adopt is a partnership. At law, each partner is able to legally bind all other partners with their actions, even though the other partners aren’t aware of the obligation or liability. VERY DANGEROUS!
Anyway, don’t let all this put you off. At the end of the day, assess the risks of not dealing with any of the issues up-front. If you’re comfortable, then by all means go ahead, but remember that the risk remains.
Elysium-MMortgage HunterParticipant@mortgage-hunterJoin Date: 2003Post Count: 3,781
Just to take Elysiums point a step further.
If you borrow jointly then you are individually liable for the whole debt. If two people can’t meet payments – guess who has to?
ie if you have a third share in a property and it’s mortgage then you have a 100% liability to the debt.
This can really affect subsequent lending power.
0425 228 985
Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.AUSPROPParticipant@auspropJoin Date: 2003Post Count: 953
People warn you about the dangers of partnerships, but like a lot of things in life, you tend not to take the threat seriously until it starts to sting. Anything that involves committing to joint and several liability – DONT DO IT!
Extensive list of new Perth property available for sale.
Alternatively, become a joint venture partner in one of our property development partnerships – contact me to find out why our developments are unique. John – 0419 198 856jon.hillman28594Member@jon.hillman28594Join Date: 2003Post Count: 3
Gday Michelle, Depends on lots of things; how many properties, common objectives, how many people, individual profiles, MoU drafted, etc. Sometimes its better to invest in some good legal advice…no, I’m NOT one! RU in Sydney? Jon
This statement is not necessarily accurate..
“At law, each partner is able to legally bind all other partners with their actions, even though the other partners aren’t aware of the obligation or liability. VERY DANGEROUS!”
Whether you form a trust or other entity, you should have a joint venture/partnership agreement which details each partners role, procedures, legal considerations, etc.
Any competent legal counsel can prepare an agreement which will restrict all partners from making decisions or conducting transactions etc, that can adversely effect the partnership or people involved.
Thanks for your input.
I’m simply stating the basic position.
You may be right technically, in relation to limited partnership structures, but technicalities rarely work in real life. The circumstance in which you’d be arguing that technicality will more than likely be in the courts. I’d rather take a different path and avoid that altogether.
As I said, it’s simply an issue of risk tolerance. If you’re going to have a legal agreement prepared anyway, why use a partnership when you can use better structures (from a liability limitation perspective), like a joint venture, unit trust or company structure?
To clarify my feedback, a “partnership”, “joint venture” or “operating” agreement [fundamentally one in the same] should be structured to protect the partner’s interests.
This is seperate to the entity itself – it does not matter whether the entity is a LLC, unit trust, limited partnership or otherwise, the agreement includes the operating parameters of the partnership/company and legal considerations.
“technicalities rarely work in real life. The circumstance in which you’d be arguing that technicality will more than likely be in the courts”
Partnership/Operating Agreements are the foundation of my business. To date neither myself or any partner/investor has required court intervention, or been subject to liability proceedings – because of the agreements we put in place.
My point being, no matter whether the partnership is 2 or 20 people, conducting $10K or $10M transactions, it is recommended that an agreement is prepared to protect each parties interest moving forward.
Not having an agreement increases risk significantly, and will potentially result in legal proceedings.
Thanks for your response.
I agree that having a good legal agreement helps avoid problems – that was the whole thrust of my first post. However, I (respectfully) don’t see how that supports your point regarding partnership liability.
The terms “joint venture” and “partnership” have fundamentally different legal natures. Many people use the term “partnership” in a loose fashion, to encompass the different legal structures that could be used. But that is the same as calling apples, oranges and mangoes “fruit”. Sure, use the term “fruit” in general discussion, but lack of precision leads to confusion, especially when you’re trying to explain what’s specifically good and bad about mangoes, which has nothing to do with apples or oranges.
Similarly, I was referring specifically to a legal “partnership” in my first post, for the purpose of making a precise point.
You could prepare an agreement to take all the “bad” things out of a partnership, but then it would no longer be a partnership, but perhaps rather a joint venture? Add transferable rights, and you might as well call it a unit trust?
Many structures comprising multiple investors are called “syndicates”. But what is a “syndicate”? When you look closely at it, it’s usually a unit trust type of structure (which is the case for many managed investment schemes, even if they don’t call the interests in the scheme “units”), or a company structure (where each investor owns shares in the company which carries on the particular project).
I don’t intend to discount your experience, and in fact have no right to do so, since I don’t know you. But I maintain my view that a partnership structure, as opposed to a unit trust, joint venture or corporate structure, is fraught with risks, especially for first timers. An agreement costs pretty much the same to prepare anyway, whether it’s a partnership agreement, joint venture agreement, unitholders’ agreement or shareholders’ agreement, so if you’re going to all that trouble, why bother with a partnership, when you know that the risk (of a partner binding the others) can be simply avoided by using one of the other structures?
I also disagree with your point regarding the “entity”. I agree that the “entity” is separate from the commercial structure. However, the “entity” can either be a person or a company. The vehicle, or structure, dictates relationships between the entities involved. A trust is merely a structure, as is the case with a joint venture. In the case of a company, the entity is the structure, and the two are inextricably intertwined. Of course, the shares in that company can either be held by people, companies or through a trust. And the trustee of a trust can be either a person or a company.
I think that being more precise in using terminology helps avoid confusion.
In any event, I think we (or more precisely, I!) may be splitting hairs for the purpose of this forum. Sorry for boring the rest of you forumites.
I enjoyed your response, but I was not so concerned with the technical aspects, as outlining a fundamental consideration for someone who it appears may not have much experience in the formation of partnerships/joint ventures or otherwise.
If you refer to my original post you will see I was not critical of [or concerned with] the structure itself, rather your comment re: liability issues, and how this can be avoided.
“the “entity” can either be a person or a company.”
With all due respect, I think it was clear what I was referring too.
“I think we (or more precisely, I!) may be splitting hairs”
Yes, there is no point confusing anyone. The key points I think we are trying to make are 1. select the appropriate entity type 2. ensure a formal agreement is in place to protect the interests of all concerned.
Both steps should be discussed with qualified legal counsel.
— MichaelANUBISParticipant@anubisJoin Date: 2003Post Count: 559
My first few purchases with friends tied us up greatly. Three of us purchased together, but as previously mentioned when it came to looking for more funds the banks treated us as though each of us had borrowed the total amount individually, and not as one third each.