Details of specific types of partnerships:
Today for our Real Estate Graduate call we had our end of month Questions and Answers. This always brings out various topics among the participants. Today we had many topics but the major ones were based on more specifics about how certain kind of partnerships are best in specific situations.
We discussed questions on Joint Ventures. A definition can be:
A joint venture (JV) is a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets.
We discussed that this can be instituted when a project is focused on by two parties or more. The intent can be one project only. If it unfolds that an interest opens up to more projects then the structure could be changed.
Another interesting partnership discussed was Tenants in Common. A definition can be:
Tenants in Common is one of the ways to hold title , to own property, by two or more individuals. Sometimes it is referred to as Tenancy in Common. There is no limit to the number of individuals who can hold title to one piece of real estate. A property held by tenants in common can be owned by two owners or 100+ owners.
Of interesting note, to mortgage a tenants in common property, in other words, to take out a loan, most lenders would require the signatures of all of the parties in title. Otherwise, if a lender made a loan to only on party, only that person’s portion of ownership would be security for the loan, and lenders want to be able to seize all of the property in the event of default, not just part of it.
On the other hand, if 3 people held title as tenants in common and one person stopped contributing to the mortgage payment, the remaining two would most likely still be liable for the loan. This is one reason it’s important to choose your tenants in common wisely.
This type of structure is typical for experienced investors sharing a project with those that are new to investing but might have money to put into the investment. This can allow all involved to have their fair share of ownership in the property. Upfront documents can also state how one can withdraw or be bought out by others when interests change of a particular partner.
We finally discussed REIT’s. A definition can be:
A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.
Equity REITs: Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties’ rents.
Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.
Hybrid REITs: Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.
This is more of like investing in a stock fund. You are choosing a fund that is managing the investment of Real Estate instead. Your investment and return is set up like a stock requiring the payment of capital gains taxes as well.
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