In today’s bonus episode, we are going to discuss the difference between a syndication and a joint venture deal.
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Is one riskier than the other? Which one works best for you? These are questions that can only be answered by defining your investing parameters! That’s the first step in deciding the right choice for you.
Find out, in another bonus episode of Multifamily Investing Made Simple!
“There was a case in 1946, which was WJ Howey versus the sec where they actually sat down and figured out, okay, what’s the difference between a couple of guys starting an enterprise together, and someone over here is selling shares of a company.” – Dan Krueger
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Syndication VS JV
[00:00:00] Dan: So what the heck is the difference between a JV and a. What the heck is a JV let’s get into in today’s video.
he was going on guys. This is Dan Kruger from Invictus capital. And today I want to try to de-mystify the difference between a JV otherwise known as a joint venture and a syndicate. If you guys have gone down the real estate rabbit hole, you’ve probably stumbled across syndications and or joint ventures.
Maybe you haven’t gotten to both yet, but at some point you will. And you’re probably going to be a little confused by one of them. So today we’re going to break down the differences between the two, uh, so that you, as an investor can be aware of what all the options are, uh, that are out there and which ones are a great fit for you.
So let’s dive into it, a joint venture JV. Is effectively just a partnership. It’s an, it’s an operating agreement for an entity, [00:01:00] uh, where you’ve got partners who are participating in a venture, a joint venture, uh, kind of makes sense. Now, a syndication, um, uh, JV would be akin to almost any business you would start with, um, you know, a partner, if you and somebody wanted to open up a dry cleaners, you and your neighbor, you go 50 50 on it.
You’d open up a JV effectively. It’d be an operating agreement. You have an entity, all that good. Not too complex. You can usually do it by yourself on the secretary of state’s website for a couple of hundred bucks and you open up a bank account and there you go. You got a little JV. If you’ve got you, plus at least one other person now syndication, that’s the thing where, uh, that’s, that’s the part where people get a little bit more confused.
That’s where things get a little bit more complex and could be a little bit mysterious. Now these are actually good. Securities more or less. And that is really the key distinction here between a joint venture and a syndication is one of these is technically a security. Uh, it’s a financial product, uh, can do a share of stock in a company.
[00:02:00] And if you are going to be selling these. You know, in a joint venture you’re giving your, your partner shares. You know, you could look at that as selling them shares almost right. Basically the same thing. Uh, now in a syndication, you’re going to be selling these shares to investors. And there was a case, a very, uh, important case in 1946, which was WJ Howey versus the sec where they actually sat down and figured out, okay, what’s the difference between a couple of guys starting a, an enterprise together, and someone over here is selling shares of.
Uh, his company and, you know, not registered with us the sec as a, a, uh, uh, you know, a security that’s being sold. Um, there’s kind of this gray area for a long time in this case, defined it. And they did it. And basically four questions. If you can answer these four questions, you can determine whether or not you are in a collaborative venture with a partner or a syndication, which is a financial product, a security question.
Number one, is there an investment of. And well you’ll notice here is the answer to almost everything that you’re going to do is going to be yes, for the first three. And number four is the one that [00:03:00] matters. So number one, is there an investment of money? Probably if you’re asking yourself this question, uh, is there a common enterprise?
This is effectively just, um, uh, partners pooling their resources into, uh, an entity, one, one place, one, a depository. Um, is there an expectation from the investor of a share of the profits? Typically, I think if someone’s investing money, they’re going to want to see something for it, unless they’re just giving you money for free and forth.
The one that matters here are those profits solely from the efforts of an operator or actually going to take this verbatim solely from the efforts of the promoter. If yes, then that’s a security and that’s really the one that matters, because like I said, in pretty much any deal, you’re looking at the first three, you’re going to answer.
Yes. To the big question. Is, are you paying. Are you a passive investor or are you materially involved? You don’t need to be running the show, but are you doing something other than just contributing capital and sitting back and expecting the promoter, uh, in this, uh, verbiage from the, [00:04:00] uh, from that case, from how he case, uh, you know, are you kicking back in the promoters, doing everything and you’re getting a, share the profits for a country.
Are you passive? That’s the big thing that you need to be looking at. And that’s what differentiates these things in a joint venture. You can have a partner that’s relatively passive, but still more active than just giving you capital. Now this could show up in many different ways. So you could still structure deals with partners that aren’t doing a ton of stuff, but they’ve gotta be doing something more than just giving you money.
Uh, this could be signing on the debts, taking on a little bit risk, a little bit of risk of loss from, uh, signing on the day. And just contributing capital. They could be helping find the opportunity. They could be providing underwriting analysis services, management services, legal professionals are always valuable to have on a team.
Same as tax professionals, brokers. All of these people are infinitely valuable in these types of transactions and real estate transactions. And so there’s really, you just have to. At least a couple of boxes outside of capital, uh, so that you can show that you are involved in this deal in some way, shape or form.
And [00:05:00] it’s not just you kicking back and waiting for the promoter to produce the profits. So that’s really the thing that matters. I think that’s the biggest segue from this video is, are you passive or are you materially involved in some other way? Joint ventures can be a great resource for people out there.
We’ve got a lot of partners who come in with a 10 31 money or, or, you know, for one reason or another, have a specific needs. Put together joint ventures for these, these partners, but they’re a little more involved than somebody would be in a syndication. So there’s going to be a little bit less risk in a syndication.
You’re not going to be signing on the debts. That’s one of the perks you could only lose as much as you put in, in a joint venture. There is a little bit more risk of loss there. So it’s up to the individual, what works best for them. But I think the big thing that we want to get across here today is that if you are passive, then you’re probably looking at a syndication or at least you should be, hopefully this helps you.
Yeah, hopefully this helps clear some things up for you guys on the whole joint venture and syndication conversation. Uh, if you haven’t already done it, please like share, subscribe, push all the buttons down below other than the thumbs [00:06:00] down. And we will see you in the next video.