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therealestatesparkblog · 5 years

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Q & A With Real Estate Attorney: Structuring JVs, Newbie Closing Mistakes, and How to Build Your Team

Whether youre on your way to your first deal or your 50th, one thing you cant escape is the paperworkyouve got to get your deals signed, sealed, delivered. For that reason, one of the most important pieces of your team is your legal representation. You need lawyers for real estate, contracts, andeventually, as you graduate to developmentand use and zoning regulations. The Importance of Legal Representation in Real Estate In my case, one particular land use and zoning attorney single-handedly, overnight, took my business from two- and three-family properties to high rise developments. Because of thisI kid you notI ended up on the cover on my home countrys version of The Wall Street Journal, with words like glorious and tycoon used to describe me. What?!

Imagine that. Only in America. I started my real estate company in 2016, basically just picking up smaller duplexes and triplexes. In late 2017, my father, my nephew and I set up a development subsidiary. We started with $850,000 in seed capital to pursue more aggressive opportunities. Since then, weve exploded, inching close to $80MM in the development pipeline. One of the key components to that growth strategy has been how we structure our acquisitions legally. (And not legally as in not illegal, but legally like the legal composition of the transactions paperwork.) Structuring Deals as Joint Ventures My favorite method is through joint ventures (JV). In Q1 alone, weve gone under contract for over 200,000 square feet of buildable real estate. Altogether, when built, those properties have an estimated $56MM aggregate valueall through the JV. Dmitriy Ishimbayev runs his law firm from the 85th floor of the World Trade Center. This is us here, actually discussing the structure of one particular simple JV we thought we had in the books.

Since the deal isnt happening, Ill spill the beans. Hopefully the person who reneged will read this and feel embarrassed (since well most likely do business in the future). A piece of shovel-ready land (i.e., no approvals needed) on a corner lot by Temple University was for sale at $175,000owned free and clear. It was a decent corner lot. It didnt work as a straight buy at that price point. But it could work as a JV.

Gist of This Deal Sellers bring the land. I bring the capital. A third partner builds. We earn an even 33 percent for each. For this specific deal, we were looking at an ARV of $1 million at $600K to build. Usually you structure these a bit differently, but in this case, it turned out everyone actually knew each other. Happy days. Lets just keep it simple, I said. And well roll over the proceeds to a larger deal. Seller agreed. All agreed.We sent the contract and were just waiting for the signature. All of a sudden, the seller wants money. The third partner texts me with the news, asking, What price point would you consider it at for a straight buy? Im not interested, I responded. It doesnt work as an acquisition, only as a JV. I didnt care what discount the would offer me, a deal is a deal. So the deal was off. It is what it is. It happens. To be honest, I was doing the deal to let my 20-year-old rockstar associate KT build his own portfolio and earn his first promote. Lesson? A deal isnt done until the ink is dry. I mentor many young investors, either through advice or smaller co-investments. And they often ask, How do you talk landowners into giving you their land?! Well, its a little more complex than that. (Im going to write about this particular growth strategyand how I do itin detail in another piece.) At the end of the day, your paperwork has to be airtight. So I figured we should get the answers straight from the horses mouth: the attorney behind the activity. Q & A With Real Estate and Business Attorney Dmitriy Ishimbayev I went back to World Trade to sit down with Dmitriy. And boy, do I have some gems to share with you. In this question and answer session, we discussed mistakes newbie investors make, how to avoid them, and what every new investor should look for before, during, and after closing.

Whats up, D! Dmitriy Ishimbayev: Hello, Philip. Lets do this. You see a million deals on a daily basis, from single family to high rises. Whats the number one mistake you see real estate investors make contractually? I think the number one mistake real estate investors make is that they do not include the right contingencies. Or, even worse, they dont put contingencies at all. A lot of real estate dealsfrom tiny deals to complex transactionshave skeletons. And you, as an investor, should have an option to get out of the deal if the deal turns out not to be what you signed up for. When youre new to something, you really dont know what you dont know. Whats the best advice you can give young real estate investorsentrepreneurs evenas they get ready for their first deal, investment, or even business? I always tell my clients, be it entrepreneurs, real estate investors, or business owners, start building your team earlyand dont do it alone. Find people with experience in your fieldand that applies to mentors, lawyers, accountants, and other advisors. Does that mean find someone with decades of experience? Do not hire a lawyer just because he or she has 30 years of experience. Find a lawyer who has experience in what you plan to do. If youre an entrepreneur, find one who understands the fast-paced world of a startup. If youre a real estate investor, one who understands the complexity of a real estate transaction. But most importantlyas cliche as it soundsfind people who care about the success of your venture and who are interested in building a long-lasting relationship with you. What are the main issues you see come up during a closing period? In most of the deals, things come up the last minute, and you need to make sure that you have an experienced attorney who knows how to navigate the deal toward closing. Most delays happen because one party relies on the other party to do something (thinking, Well, it is not my responsibility) and loses sight of the end goal of everyonethe closing. So make sure your attorney stays on top of all the parties involved, the attorney representing the other party, lender, title company, brokers, etc. One of the issues that comes up quite often is people underestimate how long it takes to accomplish certain tasks, especially when you deal with lenders, coop boards, or municipalities. For example, to order a collateral for a simple co-op sale can take four to six weeks; getting an inspection done by the city officials can take weeks. The lesson: start early with all the paperwork and dont leave anything until the last moment. Some readers may be thinking, How do I do a JV? Whats the benefit of a real estate joint venture? JV is a great tool that allows you to be creative in how you structure a transaction. For example, in the Temple triplex deal [you mentioned earlier], each party had a unique asset or skill: one party was to contribute the land, another was to bring financing, and the third was to develop the project. Is this common and can other investors do this also? This type of JV is somewhat common for real estate transactions. The main benefits of a JV from a legal perspective are that it is very flexible and it allows to share the risks between the parties. Once you decide, however, to go the JV route, make sure you have a written JV agreement, outlining all the duties and responsibilities of all parties involved.

What other questions do you have about joint ventures? Let me know in a comment below! https://www.biggerpockets.com/blog/real-estate-attorney-jvs-mistakes-team

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