Legal Ownership Structure when Buying Multi-family Properties

First of all, I want to welcome the many new subscribers who have recently joined us and downloaded my free 70-minute video called Crash Course on how to invest in multi-family properties’.  If you have not yet seen it, just click on this  link: http://www.youtube.com/watch?v=5ER80dBtsfE). It’s loaded with content.

As many of you know, I’ve just added 53 units (2 properties) to my portfolio in the last 2 months so life has been really hectic but moving in a direction I have chosen. I cannot complain. I also took time off with my wife and 3 children to go to Mexico to celebrate. We have an agreement that with every building we buy we take a trip. Although for the second building my sons are negotiating with me to buy a four-wheeler (quad) instead of a trip abroad. We’ll see how this negotiation ends…

A couple of weeks ago, a former student of mine who took my live training event last year (see below for next event on May 25 & 26 in Edmonton & discount click on link:  http://www.multifamilyblueprint.com/events/) contacted me to get some advice about his first multi-family purchase. He ran into some challenges with regard to the ownership structure he had chosen for this property. Basically, he had a number of joint venture partners, six or so I believe, and the lender wanted all of them to be on title and to provide personal guarantees. He had not foreseen this requirement from the lender and had to go back to his money partners to inform them that they too would be required to be on title and provide personal guarantees.

Accordingly I decided to write a blog post about the subject of legal ownership structure from a financing point of view.

First, my overarching advice is for you to keep the legal ownership structure SIMPLE! You want to avoid having a large number of JV partners on title if you can for the following reasons:

  1. Banks and CMHC like simple ownership structures;
  2. It’s going to be easier for you to manage your JV with fewer people on title.

Let’s start by looking at reason number one with regard to why banks and CMHC prefer a simple ownership structure.

When you approach banks and CMHC for financing your apartment building purchases, they always look at it from the worse case scenario that is what if you, the borrower, were to default on the loan? So they’ll look at the borrower’s personal net worth to make sure there is enough to cover a possible claim. Usually (at least CMHC and many conventional lenders) will require 25% of the loan amount in personal net worth. The borrower, whether it’s a corporation or a person, guarantees the loan for 100%.  In most cases the borrower is a corporation and accordingly personal guarantees will be required in addition to the corporate covenant (guarantee).

Banks and CMHC will also look at how easy it will be for them to ‘realize on the security’ that they took in exchange for the loan. Another way of putting it is how easy will it be for the bank to take back the property and go after the people who provided personal guarantees.  The more people there are on title, the tougher it will be to realize on the security and the more signatures from all on title and legal intervention there will have to be. Not good! Hence the rationale for simplicity.  I remember from my days at CMHC that usually (not cast in stone) banks generally don’t like to see more than 5 or 6 people on title.

Keep legal control the property

Now, let me address the second point about making it easier the JV leader to manage the joint venture.

I would recommend that the leading partner, often called ‘finder’, retain legal control of the property by having all the voting shares in order to enable him or her to call the shots. Certainly, this is how I structure the majority of my joint ventures. I should also point out that I generally do not need anyone else to qualify for financing. Accordingly, my money partners are not usually on title and do not need to provide personal guarantees. I alone provide guarantees.  Accordingly, I take on the biggest risk. The bank and/or CMHC can come after me, but not after my money partners if we default on the loan.

Again, every deal is different but the above represents my views and my strategies in structuring the legal ownership of my joint ventures keeping in mind that simple is usually better. I would recommend that you discuss the legal ownership structure with your lender early on into your deal so as to avoid surprises.

Until next time.

To your success in all areas of your life,

P.S. I still have 5 seats left for my live training event in Edmonton on May 25 & 26. It’s Canada’s only experiential training for multi-family investors and right now you get 30% off the regular price. Check it out by clicking here:      http://www.multifamilyblueprint.com/events/

 

7 Responses to Legal Ownership Structure when Buying Multi-family Properties

  1. Gary Young says:

    I appreciate knowing the rationale. Unfortunately, it is not always possible to have sufficient personal net worth to keep financing simple. Thanks, Gary.

    • admin says:

      Hi Gary,

      I understand you completely. Unfortunately, this is one of the hurdles investing in multi-family properties. If you don’t have sufficient net worth, then you may need to bring someone on title who does and then split ROI accordingly.

      Thanks for your comment.

      • Ed Les says:

        Pierre-Paul,
        Thanks for an excellent post.
        However, if I alone am on title, when it comes time to implement an exit strategy, say in ten years, how will Revenue Canada treat realized capital gains? Will not the entire capital gain be attributed to me since I alone am on title, rather than being attributed evenly to my JV partners?
        Thanks.

        Ed

        • admin says:

          Hi Ed! Thank you for your comment.

          I’m not a tax specialist by any means. However, I believe you are right in saying that if you’re alone on title and there’s a gain, it’s taxable. If you make money you got to pay taxes. The more you make, the more you pay…

          • Ed Les says:

            Perhaps a better strategy with multiple JV’s would be a corporate syndicate? Say a numbered corp with for example 10 partners, each owing 10% of shares, with the corporation on title.

          • admin says:

            Hi Ed,

            Actually, lenders always like simple ownership structures. The legal process is a lot easier if you default to go after the guarantors.

            Thanks for your comment.

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