Looking for partners in Watercolor purchase

[bamasam]

In one sentence, what is your main objective that requires you to set up an elaborate partnership scheme with strangers vs. renting or buying outright?

GWDave pretty much hits the nail on head...the devil is in the details.


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In one sentence....

To enjoy the benefits imparted by ownership while sharing the expenses associated.

Casey

 

[SHELLY]

In one sentence....

To enjoy the benefits imparted by ownership while sharing the expenses associated.

Casey

Joe is selling fractionals in Watersound @ $275 a pop. They've done most of the hoop-jumping for you.




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[SHELLY]

I am sorry for the dissertation.
Casey

After all that, one would NEED a vacation.





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[bamasam]

Joe is selling fractionals in Watersound @ $275 a pop. They've done most of the hoop-jumping for you.




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Actually we want to be in WC. There are fractional WC PRC but they don't meet our needs as well as a SFH. WS is not our target community but thanks for the suggestion.

 

[bamasam]

After all that, one would NEED a vacation.





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Yup. I always do my homework. Actually, we will be back down for a little RR as well as business next week!

 

[GreenWaveDave]

Hi all - not Sam but Sam's husband. I figured I'd give you an answer as opposed to allowing my wife to translate.

Dave - an LLC affords the owners several advantages from both a tax and legal perspective. Most importantly, an LLC provides the group of owners the luxury of seperate legal liability. As you may know, an LLC, like an S or C corp, may exist and operate as a separate legal entity under the law. Hence the need for an operating agreement.

As far as an operating agreement is concerned, our agreement has a contra asset account for the individual items you mentioned - R&M, ect. The reserve account can be administered in sevaral ways, i.e. credited annually, quaterly, monthly, or in an other fashion the partners deem most appropriate.

With respect to management of mortgages, the most common issue involves "joint and several" liability with a single mortgage on the investment property. That is, does each and every partner want to be liable for the other partners share of a single loan. I would suggest that no one opt for that position for the very reasons you mention in your post - change in economic status of one partner can adversely impact the other partners fiscal position.

The best situation is to have each partner pay cash for their respective share of the home and not mortgage the investment property. That will allow each partner the peace of mind to know that the property is not collateralized by any other partner. In a perfect world, that ends the mortgage issue.

Now, short of that, if the partners wish to place a mortgage upon the investment property, it can be structed in a couple of fashions to limit the exposure and joint and several liability of the partners. One way to do this is to allow the LLC to hold the mortgage as opposed to the individual owners. There are some other hurdles that must be addressed by the partners and the underwriter of the mortgage for this type of arrangement to be successful (i.e. a significant portion of cash down at time of purchase and a mortgage balance considerablly less than the appraised value of the investment in question).

Additionally, if each owner in the partnership wishes to collateralize the home with an individual liability, then this would need to be done through a single lender. For example, if there were 3 partners, each partner could apply for an individual mortgage collateralized by the investment in question through Bank X. If Bank X issued three individual mortgages to each of the three partners, then Bank X would be the only secured leinholder of mortgages on the property. At that point, rank secured order of the mortgages would not be an issue (1st secured creditor, 2nd secured creditor, ect) becasue there is only on lienholder and it is Bank X exclusivly.

The daily/weekly/monthly administration of the payments can be handled in a number of ways. In our agreement, the partners will assume officer postions in the business (as is the case in any business). The officer roles defined in our agreement carry certian responsibilities. Of course, you also may consider outsourcing payment services to a thrid party.

I am sorry for the dissertation. As a disclaimer, I must say that the statment herin are netither specific professional accounting nor legal advice. You should always discuss these issues with your CPA or attorney prior to engaging in any such investment.

Casey

Does anyone have any local attorneys they would recommend that have experience in creating these types of partnership operating agreements and setting up partnership structures like you mention that mitigate liability and financial risk for situations that must involve mortgages among partners?

 

[Geo]

Hi all - not Sam but Sam's husband. I figured I'd give you an answer as opposed to allowing my wife to translate.

Dave - an LLC affords the owners several advantages from both a tax and legal perspective. Most importantly, an LLC provides the group of owners the luxury of seperate legal liability. As you may know, an LLC, like an S or C corp, may exist and operate as a separate legal entity under the law. Hence the need for an operating agreement.

As far as an operating agreement is concerned, our agreement has a contra asset account for the individual items you mentioned - R&M, ect. The reserve account can be administered in sevaral ways, i.e. credited annually, quaterly, monthly, or in an other fashion the partners deem most appropriate.

With respect to management of mortgages, the most common issue involves "joint and several" liability with a single mortgage on the investment property. That is, does each and every partner want to be liable for the other partners share of a single loan. I would suggest that no one opt for that position for the very reasons you mention in your post - change in economic status of one partner can adversely impact the other partners fiscal position.

The best situation is to have each partner pay cash for their respective share of the home and not mortgage the investment property. That will allow each partner the peace of mind to know that the property is not collateralized by any other partner. In a perfect world, that ends the mortgage issue.

Now, short of that, if the partners wish to place a mortgage upon the investment property, it can be structed in a couple of fashions to limit the exposure and joint and several liability of the partners. One way to do this is to allow the LLC to hold the mortgage as opposed to the individual owners. There are some other hurdles that must be addressed by the partners and the underwriter of the mortgage for this type of arrangement to be successful (i.e. a significant portion of cash down at time of purchase and a mortgage balance considerablly less than the appraised value of the investment in question).

Additionally, if each owner in the partnership wishes to collateralize the home with an individual liability, then this would need to be done through a single lender. For example, if there were 3 partners, each partner could apply for an individual mortgage collateralized by the investment in question through Bank X. If Bank X issued three individual mortgages to each of the three partners, then Bank X would be the only secured leinholder of mortgages on the property. At that point, rank secured order of the mortgages would not be an issue (1st secured creditor, 2nd secured creditor, ect) becasue there is only on lienholder and it is Bank X exclusivly.

The daily/weekly/monthly administration of the payments can be handled in a number of ways. In our agreement, the partners will assume officer postions in the business (as is the case in any business). The officer roles defined in our agreement carry certian responsibilities. Of course, you also may consider outsourcing payment services to a thrid party.

I am sorry for the dissertation. As a disclaimer, I must say that the statment herin are netither specific professional accounting nor legal advice. You should always discuss these issues with your CPA or attorney prior to engaging in any such investment.

Casey

Casey,

Wanted to say thx for taking the time to post all of this. It is very valuable information and it is greatly appreciated!!!!!!!!!!!!!!!!!!!!!!!!

Pls continue to add value to the boards as you already have...

GW

 

[Beach Runner]

Joe is selling fractionals in Watersound @ $275 a pop. They've done most of the hoop-jumping for you.




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On another thread that offer had been dissected, and the conventional wisdom is that it's not a good deal for anyone but Joe.

 

[SablePoint]

Does anyone have any local attorneys they would recommend that have experience in creating these types of partnership operating agreements and setting up partnership structures like you mention that mitigate liability and financial risk for situations that must involve mortgages among partners?

My wife and I are about 60 days from completing construction of our WaterColor home. We had just begun testing the waters for potential partners (after spending many months researching and putting together our partnership plans) when Sam & Casey contacted us to express their interest. We met with them at WaterColor about 10 days ago to show them our home. Ultimately Sam and Casey were more interested in having a house directly across the street from Camp WaterColor in Phase 2, whereas our house is located in Phase 3 (which we absolutely love). But Sam and Casey obviously believe, as we do, that forming a partnership is good way to go and provides many obvious advantages.

For our partnership agreement, we retained the leading attorney in the field of Vacation Home Co-Ownership (Andrew Sirkin, of Sirkin Paul Associates). Eighty percent of Mr. Sirkin's business comes from writing vacation home co-ownership contracts. We spent a lot of time and substantial $$$ in consultation with Mr. Sirkin... and ultimately recieved a comprehensive customized partnership agreement that addresses virtually every conceivable contingency based on his years of expertise in this field. We've since had three potential partners, who are also attorneys, who reviewed the document and were impressed with the detailed nature of the document and were satisfied that it comprehensively addressed every issue.

If anyone is considering developing a vacation home partnership such as ours, I highly recommend Mr. Sirkin's service (see more at www.TICLawyers.com).

One of the things that Mr. Sirkin told us was, contrary to everyone's concern about financing in these partnership agreements, that he rarely sees problems in this regard. If the partnership agreement is properly structured (which ours is), it addresses all of those contingencies. Interestingly, Mr. Sirkin said the most frequent problem that he sees is minor bickering reagrding decorating and furniture being rearranged by other partners. And this is exactly what several friends and aquaintenances of mine who own vacation homes with partners report (of course, our partnership agreement also addresses these issues in detail as well).

The bottom line is that vacation home co-ownership is not a new phenomona. People have been doing it for decades... and smart attorney's have developed refined agreements to insure that they operate smoothly. Partnerships are becoming more and more prevalent because it just makes good sense to share usage and expenses on a property that you will only use part time.

I wish Sam and Casey the best of luck in putting together their partnership. By splitting expenses such as Taxes, Insurance, Maintenance, Repairs, and HOA fees among, for example, four equal partners... it ultimately makes ownership in premier communities such as WaterColor more reasonable and affordable, and within the reach of many who may otherwise not be able to own such a fantastic vacation home.

Another thing that I like about it is that it keeps us from having to rent out the home. While there seems to be many people who are quick to criticize having partners in a vacation home (while not really having any experience or knowledge on the subject)... having a home that you must rent out to make ends meet is a much more undesirable option to me. I've done it before and I don't want to do it again. I want to be able to use the property... not feel like I'm costing myself money by using it in the high season when I could be renting it. Dealing with bad rental management companies who take exorbitant commissions for inferior service, and renting to tenants who destroy your property with no repurcussions (because the management company doesn't want to alienate a "good repeat customer")... are all things that I can choose to do without this time.

I plan to enjoy using my home in WaterColor... not getting stressed out over constant damage by renters every time I go on vacation. And since wear and tear is ultimately going to occur even with partners, I like the idea that I'll be sharing the costs with my partners and not footing the bill 100% by myself. Of course, sharing the expenses is not just limited to wear and tear. Consider that you'll need to paint the exterior of the house every 5 years (or less if you don't use good quality paint and a good painting contractor). Depending on your financial situation, this can be an expensive proposition if you must pay for 100% of the cost. Or it can be easy to handle if you're sharing the cost with partners. Even better, if you have a good partnership agreement and a properly run LLC, you'll be escrowing funds into a Maintenance and Repair account so that when these expenses come due, you'll already have the cash available and you won't even feel the pain of having to write large check.

Indeed, a properly structured and operated partnership can make ownership and usage of your vacation home much less stressful than owning the home wholly on your own. And... all the while... the home will continue to benefit from long-term appreciation as well as any other home in WaterColor (which may not be the case with products like fractionals such as the PRC).

By the way, this is NOT a fractional or timeshare. The term "Fractional" essentially refers to creating several smaller "fractional" deeds instead of having only one deed to a property. St. Joe doesn't allow fractionals other than their PRC. Anyone who calls it a fractional or timeshare doesn't know what they're talking about.

This is not any different than 4 college buddies buying a vacation home together... with the exception that we're not necessarily all college buddies. Instead we may just be people who share the same affinity for WaterColor. Because we're not necessarily best friends, it can actually make for a stronger partnership because it can be operated more professionally and less emotionally.

More important than the issue of how to finance the property... is simply the desire and will (and decision) to own in WaterColor. Once you've made the decision that you want to own and vacation in WaterColor for years to come... then you can begin to look at your different alternatives. If you can afford a home wholly on your own... then this discussion is probably not applicable to you. The PRC has been mentioned many times before, and I personally believe that partnering in a custom home is a much more desirable alternative versus a buying into a 2 BR condo (think re-sale here).

So if you want to own in WaterColor... and either cannot, or do not want to, buy wholly on your own... and aren't interested in a condo or a PRC fractional... then partnering is a logical, reasonable, and viable alternative.

And if you've decided that a partnership makes sense to you, you can try to put together your own small group to buy a property. Or, if you're lucky enough to know of an existing partnership group with an opening (such as ours in Phase 3, or Sam & Casey's plan to do something in Phase 2), then maybe you can get in on it.

If you do your due diligence in reviewing any partnership that you are considering... then you always have the option of NOT going through with it if you (or your attorney) feel that that particular partnership is not right for you.

I would advise those who are interested to not listen to the many who make off the cuff remarks without having any experience with what they're talking about. Do your own investigation and make an informed decision.

Our partnership already has an awesome home ready to be viewed by potential partners, the financing is already in place, and every issue has been addressed in detail in our partnership agreement. If you have interest, I invite you to visit www.129Bluejack.com, and/or contact me for more information... Wayne@Strobel.com or PM me.

Thanks,
Wayne Strobel

 

[Bobby J]

Thanks Wayne! Allot of useful info!