Property Joint Venture "Opportunity"

[detruncate]

Hi all. Situation is this:

I've recently stumbled upon an opportunity to buy a 4 story building in partnership with 2-3 others in an apparently gentrifying neighbourhood in Montreal (safe neighbourhood close to a metro stop). The plan would be to use the main floor for commercial space and reno the upper floors as primary residences (as far as I know, zoning shouldn't be an issue). We may or may not end up using the commercial space ourselves -- a few ideas have been floated, but I remain skeptical until a business plan materializes.

Nothing is tying me to my current location, so relocating would just boil down to a lifestyle decision. My source of income would also be largely unaffected.

Affordabilty shouldn't be a huge issue either if the deal makes sense -- as much as a 1/3 ownership stake would be doable in cash if the purchase price meets initial expectations. That would represent about 1/3 of my current investment portfolio (no debt, currently renting). It would also leave me lots of room to finance my share of reno expenses via some combination of cash + a personal line of credit without extending myself unreasonably. I'm single, self employed, and in my early 30s.

I'm thinking that the best way to approach the situation is in the context of buying a residence rather than as a potential investment (though, of course, that aspect can't be ignored). So... personal considerations aside, my main concerns have to do with how to structure a potential deal. And more to the point, how to protect my equity and limit my potential liability in a joint venture structure.

This is all very preliminary, but off the top of my head the key issues include:

1) How to deal with shared costs related to the residential spaces -- maintenance expenses, consruction of communal spaces (e.g., rooftop patio + garden), consequences of defaulted mortgages etc. among partners. Co-op, condo, other?

2) How to deal with the commercial space -- in particular, whether I would be expected (or required) to "invest" in any enterprise my partners decide to start to make use of this space (either directly or via opportunity costs of not renting to someone else).

3) Provisions re. sale/transfer of ownership. Both in terms of protecting my equity and protecting the ownership structure/living space from unwanted intrusion. One of the benefits of this would be to share common spaces with people I know and like, but not at the expense of exposing myself to unreasonable complications if I ever want to sell.

The plan would be to do as much of the reno ourselves as possible. One partner has done a similar reno in the past (planning + completion, though under contract) and has his own tools. The rest of us are at a "home handyman with careful research" level, but have flexible work schedules and are not averse to taking on a job of this sort. I'd imagine the guy with experience would want to guard against having to do all the work himself without compensation, so it wouldn't be unreasonable to include some sweat equity provisions. This would also provide the rest of us with additional motivation to work hard if we want to protect our equity and set a good precedent going forward.

In sum, I'm a little leery about some of the potential complications, but so far not enough to completely write this off as an obviously bad idea. The building as described seems to have a lot of potential, and I'm at least interested enough to explore the idea some more. I'll be sitting down in a few days with one of the other potential participants (an old friend who was once my business partner in a small graphic design firm) and would like to have a better idea of how to approach this situation before I get ahead of myself.

Any thoughts/comments/cautions would be most welcome.

Thanks in advance.

[thehun69]

In any type of joint venture or partnership, there are many variables that you have to consider before investing into it. You have addressed some key conccerns. My first question is: What would be the structure of the joint venture? Would it be through a general partnership, limited partnership, run through an LLC? Knowing which structure you'll be using will give you a framework to work within and give you an idea and help define your liabilities and responsibilities. Clearly you want to minimize any persoal liabilites as much as possible, additionally, unless you trust the abilities of the other partners, you want to have the roles of everyone clearly defined in the partnership agreement. These are just some of the issues you need to think about. Lastly, before you sign up and invest in anything, take the partnership agreement to a lawyer so that he can explain all of these things to you.

THE HUN.

[detruncate]

Thanks for the response. It reinforces much of my thinking. Especially as regards the necessity of drafting a comprehensive partnership agreement. There have been a few comments which seem to suggest expectations of a more relaxed structure, but that seems like asking for trouble down the road.

Anyway... I've only just begun to research the pros and cons of different ownership structures, so that's still up in the air. Mostly I just wanted to make sure that I wasn't approaching this completely the wrong way + see if anyone had any helpful anecdotes of doing something similar (re. stresses between partners and how they were or weren't overcome in particular).

[thehun69]

"a relaxed structure" will only lead to major problems in the end. The fact is, the unexpected will happen. That is a fact. When it does, you want to be well prepared and be well protected. Having a definitive agreement and partnership contracts in place does just that. These contracts are for everyone's benefits.

THE HUN.