Joint venturing your property/project – things to consider

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Joint venturing your property/project – things to consider

As property prices continue to rise across Australia, it is getting harder for people to enter the property market  to buy/hold property or to develop it for later sale.

A rising trend is that of co-ownership or with developments, to joint venture with someone else.  The type of small developments we see a lot of are the ‘Add Value Strategies’ of buy/renovate/sell, granny flat additions, duplex developments, subdividing and building an additional one or more dwellings on the block.

Co-ownership refers to the purchase of property by two or more people, be it defacto, friends or family members.

Benefits of co-ownership

  • Cash savings or funds from existing lines of credit are pooled towards the deposit, allowing you to enter the market sooner.
  • Funds can be pooled to cover costs of a Development Application.
  • Borrowing capacity for the required purchase and any construction loans is combined, resulting in the joint venturers being able to fund a better quality property or a more robust development.
  • Running expenses of the property are shared.

Risks of co-ownership

  • All parties are jointly and severally liable for the entire debt, not just their individual share.  If the purchase or project is in difficulties each venturer may be called on to support the loan payments on their own.
  • Lenders may take the total debt into account, not just your individual share, when calculating serviceability for additional loans you may want to apply for on your own.
  • Conflict may arise as individual circumstances change.
  • The market conditions may change making your initial targets unreachable.

The key to successful co-ownership is investing extra time in thorough planning and listing risks and contingencies that may arise.  Determine the best strategies for managing risks ahead of time. By seeking professional advice and drawing up a co-ownership/ joint venture agreement that covers changes in circumstances you can ensure all parties are adequately protected and agreements are clear before you enter into these arrangements.

Legal structure

The intended outcome of the purchase or project largely determines the most appropriate structure to use.  Here is a broad brush outline of  some options available to you, however, do come in to Chan & Naylor and speak with our structuring expert before making your structuring decisions.

  • The tenants in common structure is ideal for long term co-ownership. It allows for several owners to purchase unequal shares in the property and for each owner to be able to will their interest in the property to a third party. It is a more flexible form of property ownership than joint tenants where owners do not have individual ownership, but own the entire interest in the property together. Joint tenant possess a right of survivorship, i.e. the interest of a deceased joint tenant automatically pass to the surviving joint tenant/s and this structure is best suited to  husband and wife arrangements.
  • Trust structures – there  is a range of trust structures available and choice is determined on a number of factors such as tax efficiency, intention to hold property long term, intention to develop then sell the improved property.
  • Larger developments can be structured  with multiple trusts purchasing as tenants in common and subject to a Partitioning Agreement that provides tax efficiency and an agreed exit process for joint venture investors. On completion of the development, an owner can retain or sell  one of completed dwellings outside of the initial joint venture arrangement by virtue of the Partitioning Agreement drawn up at the time of initial purchase of the property.

Joint Venture and Co-ownership agreements

These agreements are legal documents designed to set out the rights and responsibilities of each owner. They are essential in helping avoid issues in the future if circumstances change.

Agreements should cover;

  • Individual contributions by each owner, including deposit and purchase price
  • Owners’ borrowings and who is responsible for the repayments
  • Who manages the project if it is a development and how they report back to fellow venturers
  • Who resides in the property (if anyone) and on what basis
  • How the arrangement is to be wound up and when
  • What to do in the event one owner wishes to sell
  • How to allocate the proceeds of the sale
  • Obligations regarding maintenance of property that is to be held longer term
  • What to do in the event of a dispute, and
  • The insurances each owner needs to maintain

Advice

As with all financial matters the right advice is crucial. You will need advice, not only on the legal structure of the joint venture/co-ownership arrangement, but also the appropriate structures to hold the property or development. Discuss your finance strategy and servicing capacity well before you commit to the expense of structures and legal agreements. You need to, first up, ensure that you can obtain the finance you will need and can afford the project or purchase you are planning.

Feel free to call Chan & Naylor Finance 02 9391 5053 if you need help or have questions in regard to Joint Ventures and Co-ownership of property.

Jenna Ford

 

Disclaimer: This article contains general information. Before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs.

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