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Real Estate Joint Ventures - Tenant in Common Solution - YouTube
Channel: Clint Coons Esq. | Real Estate Asset Protection
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- Hey, welcome back everyone.
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It's Clint Coons here.
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And in this video, we're
going to be talking about
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putting together a joint
venture with someone else.
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All right.
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Let's get stuck.
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(bouncy music)
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Okay, so here's the deal.
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If you're gonna invest with someone else
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to take a deal down,
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these are typically gonna be larger deals.
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Now it could be single family homes.
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Although I don't see a
lot of people doing that
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unless it's within the family.
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Many times what I come across is,
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commercial property,
multi-family property,
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a fourplex, something like that.
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Where two investors are coming together
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and trying to figure out the
best way to structure it.
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Now, I've got a few videos on my channel
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that discussed joint ventures
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and how to create a joint venture.
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And I discussed the use of
a limited liability company.
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By way refresher, let me just show you
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what I'm talking about.
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Let's assume that there's
this property here
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and we're gonna buy this fourplex
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and there's two investors involved.
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So I'm right here and here's
my partner Toby over here.
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And we wanna buy this fourplex,
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and we're gonna own it 50 50.
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So how do we go about structuring that?
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Well, typically what we're gonna do,
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if you go traditional joint
venture out with an LLC is,
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you'll create a limited
liability company right here
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for this asset.
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And then that LLC that you set
up is typically referred to
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as a joint venture
limited liability company.
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It's gonna be a JV LLC.
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It's going to describe how
the property is being handled,
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management, who gets paid,
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what the requirements are
from the individual investors,
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What they have to do that is,
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what happens if your run short on cash.
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Are you required to contribute
money to the LLC to say,
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we have to reroof the
house, things like that.
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You agree to sign on mortgages.
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So this joint venture
LLC is going to lay out
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all of the requirements of the
members to participate in it.
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And that's of course you would negotiate.
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Now coming into this joint venture LLC,
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you have two ways to own it of course.
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You could own it directly
in your own name.
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So let's assume that it was a 50 50 deal.
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I own 50%, my partner Toby owns 50%.
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And so individually we're
members in that company.
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Now I see a lot of people do this
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and I think it's a mistake.
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It's a lawsuit in the wings.
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It's a problem that's going to
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rear its ugly head
potentially in the future.
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Because when you own this
joint venture directly
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with someone else,
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do you know who you're
really partnering with?
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Now, it's not just Toby.
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It's the spouse as well that
you're getting involved with.
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And maybe Toby has a girlfriend
over here on the side.
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Who knows, all right, see this can happen.
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And so now you don't know who
the heck you're involved with
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because you don't know what's
going on in his personal life.
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But those issues could become your issues
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when you have him directly participating.
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Let's say, spouse finds out
about this person over here,
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spouse then wants to do
scorched earth on Toby.
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Scorched earth now comes up
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and affects your limited
liability company.
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So what I prefer to do when
I'm working with investors,
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I recommend that rather
than own that directly
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in your own names.
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Give yourself a little buffer here.
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All right, keep the individuals out of it.
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Have each individual create
their own LLC down here
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like this.
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And then you come in with
the LLCs on a 50 50 basis.
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So now any problems that
we have over on this side,
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stay with this company
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and they're not affecting
this company up here.
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So it would be business as usual.
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And there's many other reasons
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why we do like to do
the structure as well.
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Now, here's the inherent drawback
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to this type of structuring.
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If you're setting up a JV LLC,
for a quad or a multifamily,
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is that when it comes to
selling the property, all right?
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What are you gonna do?
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Well, you may think,
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well except for Clint,
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I'm just gonna sell it out of
the limited liability company.
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Yeah, obviously that's
what you're gonna do.
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But what I'm thinking
more on the lines of is
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what are you and your partner going to do?
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I mean, what are your tax planning ideas?
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Maybe when we sell this property,
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it's gonna generate for
us $500,000 in gain,
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which means that I get 250 as a 50% owner.
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And Toby gets 250 as a 50% owner.
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But the difference is that
Toby wants his $250,000
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because he wants to put as a down payment
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on a new personal residence.
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So he wants to go out and buy a fancy car
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or something like that.
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So he wants his cash.
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Whereas I'm not so concerned with that.
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I don't want that money
'cause if I take that money,
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then I have to pay tax on it.
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So what I wanna do is
engage in a 1031 Exchange.
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So I'm gonna roll it over into
this tax deferred exchange
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into a different investment property.
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In this scenario, that's not gonna happen
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because I need to get Toby to
agree to engage in the 1031,
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because the 1031 is gonna
happen up here at the LLC level.
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And so if both members you don't agree,
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then it's dead in the water.
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And so I'll be forced to pay tax.
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So how do we solve that issue?
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Well, the way to solve the issue then
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is to not set up a joint venture LLC
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like I just showed you right here.
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Instead, what you're gonna wanna do
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is come into that property as follows.
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So here's the property, the Quad.
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Each of you again, you
have your own LLC set up.
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This is imperative.
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Each investor has to have their own LLC.
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Yeah, I don't want individuals owning this
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in the scenario I'm
about to describe to you
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because it's gonna compound
your potential issues
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even more in the future.
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And I gave you an example of that.
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So now we're going to buy this property
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together with our LLC and
we're gonna own it 50 50.
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So this is my portion.
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And it's gonna be held
as Tenants in Common.
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This is called a TIC agreement, right?
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Maybe you've heard this
before and you weren't sure
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what it referred to.
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What it means is that
both of these companies
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are gonna own that property together.
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So on the deed, it's
going to state, you know,
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Clint's LLC and Toby's
LLC as Tenants in Common.
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In fact, they'll even state
the interest that I hold.
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Clint's LLC is to a 50% interest.
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And Toby's LLC is to a 50%
interest as Tenants in Common.
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So both LLCs go on title to the property.
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So essentially the property is held by
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two limited liability
companies at the same time.
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Now, when you set this up in this manner,
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you do have to file or prepare
what is called this TIC,
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Tenant in Common agreement.
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With the Tenant in Common
agreement is that just,
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it's a document that you set up
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and it outlines out What's
gonna happen with the property.
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Who's responsible for X, Y, and Z?
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How the rent's gonna be collected,
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how they're going to be
dispersed with the property sold,
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things like that, when
the property can be sold.
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So let's assume that in this deal,
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you wanna make sure that
the property can't be sold
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for a minimum of five years.
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So you agree that it's not
gonna be sold for five years,
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you put that into the agreement
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and the agreement gets recorded.
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So it's gonna be recorded
against the property.
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So people know that
this property is subject
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to a Tenant in Common agreement.
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So, you know, Toby couldn't go out there
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and try to sell his interest.
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In fact, you can restrict that,
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you can't sell your interest.
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Now, the benefit that we're
going for with the TIC
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is that it's going to
allow us in the future
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to be in complete control
of our own tax situation.
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Because when the property is later sold,
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then if Toby needs his $250,000
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he'll be able to take his 250K.
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But on the other hand,
if I don't want that 250,
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because I wanna engage in a 1031 Exchange.
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My TIC interest will be eligible.
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So this LLC will be eligible for a 1031
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on that $250,000 in gain.
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So I can have my LLC go out
and buy another property,
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not have to pay any tax.
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Toby can take his 250
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and do whatever the heck he wants with it.
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The idea is we set
ourselves up at the outset,
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the beginning,
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so we can accomplish our
tax goals at the end.
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Now, in the first example,
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there's another way it's
called a Drop and Swap.
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It's a little more complicated
to make that work out
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and it can create some
issues for individuals.
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So if you're investing with someone else,
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I think in your plan that
you are gonna sell a property
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at some point in time,
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consider using the Tenant
in Common relationship.
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You still have the same asset protection.
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You just have to make
sure you put it together
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in the way I just described.
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Hey guys, you liked the video?
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Give me some likes and be sure
to subscribe to the channel.
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Take care.
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(upbeat music)
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