Joint Venture
Property Investment - Joint Tenancy and Tenancies-In-Common
By
Oct 8, 2005, 23:18

Tenancy-in-common is a useful way of letting each part owner keep control of his share. Suppose you and a friend pool funds to buy an apartment house as an investment. If you don’t want to form a partner ship, you might decide to take title to the property as “tenants-in-common,” because this would give each of you a separate interest which you could sell, assign, give away, or pass on to heirs as you chose.

One advantage of tenancy-in-common is that each of you can use any legal method of depreciation that best fits your tax position, no matter what method your fellow investors use.

Some disadvantages:

1. Each of you is liable for all the tenancy’s debts, with no limit
2. Whatever capital is needed must come from the tenants-in-common
3. All tenants-in-common must agree on any action to be taken, which means that the property can’t be sold, improved, or even rented except by unanimous consent.

So if you want to go this route, protect yourself ahead of time by drawing up a master agreement that specifies how all management decisions are to be made and carried out.

A joint venture is still another form of group ownership, looser than a partnership. You find it mostly instates where the law doesn’t provide for limited partnerships. A group organizes to make an investment, and names one or more members of the group as trustees. The trustees will manage the business. And they’d better be rally trustworthy, because they’ll hold title to the property for the benefit of all the group. The rights and duties of the participants can be whatever they agree to among themselves. Unless a joint venture incorporates, its legal and tax implications are about the same as those of partnerships.

So much for the different kinds of realty syndication.

Now let’s look at the steps you should take while deciding whether to put any of your money into a particular group venture.

Never assume that the general partner is Santa Claus. Check his general credit standing, and his reputation for integrity. If you hear anything bad about him, even if it’s only a rumor, better forget his syndicate.

If he seems okay so far, check his record in other business ventures. Some of them should be ventures similar to this one; if he’s entering a field that’s new to him, don’t go along.

Even an impeccable record isn’t enough. An honest entrepreneur, with an unbroken record of success, can fall on his face. Study his plans as carefully as you’d study any solo investment you are considering. Does the plan of action make sense? Or are the risks greater than you want to take?

There are far too many hazards in some big ventures, such as speculating in raw land or attempting to develop it. If you don’t know enough to assess the risks and the profit potential, get advice from someone who does.

So far, so good? All right, your next step should be to study the partnership agreement and any other documents you’re expected to sign. Read every word. If you find anything the least bit puzzling, show it to your attorney or accountant. (You may want to do this anyway. Something that seems clear and simple to you may contact booby traps visible only to the expert eye. Or there may be safeguards left out that should be included).

A check list for evaluating a syndicate follows.

1. How much of his own capital will the syndicator put in? This isn’t crucially important, but it makes a plus or minus in the package.

2. How are profits to be shared? How will you fare if the project is only moderately successful, or if it falls flat? Is the syndicator realistic in his estimated of how profitable it will be?

3. Can the general partner make money even if the limited partners don’t? Will he collect a management fee? If so, is it reasonable? Will he get a commission when the partnership buys or sells property? Will he get an acquisition fee? The more money he can skim off the top before the limited partners get anything, the more suspicious you should be.

4. Is there any potential conflict of interest for the general partner? For example, could he cause the partnership to buy something that he personally owns? Could he set the price, assuring himself a profit and committing the partnership to a bad buy? Or could he cause the partnership to sell its property to him at an unfairly low price? Could he cause the partnership to do business with other firms in which he has an interest.

You can never be sure that a hidden conflict of interest doesn’t exist. But the partnership agreement should prohibit it, or at least require clear proof that the partnership isn’t being cheated.

5. If state laws permit clauses like the following, without endangering the limited-liability position of the limited partners, does the partnership agreement contain them?

1. Do limited partners have the right to fire the general partner and elect a new one?

2. Can limited partners vote on buying or selling partnership property?

3. Can limited partners approve or reject any proposed business arrangement between the partnership and any enterprise in which the general partner has an interest?

4. Can the limited partners force the general partner to dissolve the partnership?

6. How long will you probably have to wait before the partnership venture is completed and you can get your money back? Will this cause a problem for you?

7. Is there any way you can sell or transfer your partnership rights before the partnership is dissolved? What procedure would you have to go through? How big a sacrifice might this require?

8. Do you have the right to examine the partnership books, and to inspect the properties at any reasonable time? If the answer is no, this alone is a signal to stay out of the syndicate.

9. How heavily will the partnership be leverage? The bigger its debt load, the greater the potential profit – but also the greater the risk. However, high leverage doesn’t necessarily mean high risk; the risk depends on how sound the venture itself is. If the partnership will invest in existing income-producing property, and if the general partner has a record of success in this kind of venture, high leverage is favorable.

10. By investing, are the limited partners committing themselves to invest additional sums later? This often happens when a partnership is formed to purchase raw land or develop it. Maybe you’re willing and able to put in more money, but what about the other limited partners? What happens if they can’t or won’t come up with more cash? Your whole investment could be lost if the partners don’t keep providing money for mortgage payments.

This last point suggests another question you should look into: What kind of people are the other limited partners? Are they in approximately the same financial position that you are? You may not know much about them, but the offering circular should give clues. Look at the investor “qualification” requirements for further clues.

The documents presented to you may contain many pages of small print. Go through them word by word. Find out if the securities are exempt from registration – and if so, why. Find out if the securities have been qualified under state law – and if not, why. Find out whether the syndicator’s attorney and accountant are highly esteemed in their fields. Ask about a tax opinion.

 A work about tax shelters needs to be said. Investing in income property can bring you a cash flow yet give you a deductible loss for tax purposes. This is mainly because of the depreciation allowance. (Never mind that the property is really appreciating in value. Congress voted depreciation allowances because it wanted to encourage investment in real estate).

Your theoretical loss actually shelters some of your income brought in by other activities, since the write off reduces your overall tax. You may get these same benefits through a partnership that owns income property – if the transaction is structured correctly. But this isn’t enough reason to go into the deal.

People lose a lot of money by scurrying into tax shelters. Before measuring the tax benefits, make sure that the proposed venture stands up as a good investment. If it doesn’t, the tax benefits can turn out to be imaginary. The IRS turns a cold eye on investments designed without any realistic expectation of profits. In fact, the IRS says it has spotted 26,000 tax shelters, from which 200,000 investors have claimed $5 billion in deductions, that the IRS says are questionable. It wants the money they deducted from their dubious ventures. So you’d better take a long look at any arrangement promising tax benefits as its big inducement to invest.