Partnering with someone to buy notes

In this May edition of NoteWorthy, I’ll talk about what you’ll need to consider when deciding to partner with someone to buy mortgage notes.

Deciding to enter into a joint venture (JV) on a mortgage note investment involves careful consideration of several factors to ensure the success and mitigate risks for all parties involved. Here are some key considerations:

  1. Alignment of Goals and Objectives: Ensure that all parties have aligned goals and objectives for the investment. Discuss each party’s expectations regarding returns, risk tolerance, investment horizon, and exit strategy.
  2. Complementary Skills and Resources: Assess the skills, expertise, and resources that each party brings to the table. Ideally, each partner should bring something valuable to the JV, such as financial capital, industry knowledge, network, or operational capabilities.
  3. Legal and Financial Due Diligence: Conduct thorough due diligence on the mortgage notes, the borrower(s) and underlying properties. This includes assessing the quality of the notes, borrower profiles, collateral, legal documentation, and potential risks (e.g., foreclosure risks, market conditions). You’ll also want to determine which parties should be responsible for these tasks.
  4. Risk Management: Identify and analyze potential risks associated with the investment, such as credit risk, interest rate risk, market risk, and regulatory risk. Develop risk mitigation strategies and agreements to protect the interests of all parties.
  5. Exit Strategy: Agree on a clear exit strategy upfront, including options for selling or refinancing the notes, distributing profits, or winding down the JV. Define triggers for exit events and establish procedures for decision-making regarding exit opportunities.
  6. Legal and Tax Implications: Consult with legal and tax advisors to understand the legal and tax implications of the JV structure. Consider factors such as liability protection, tax treatment of income and gains, and regulatory compliance.
  7. Governance and Decision-Making: Establish clear governance structures and decision-making processes for the JV. Define roles and responsibilities, voting rights, decision thresholds, and mechanisms for resolving conflicts or disputes.
  8. Communication and Transparency: Foster open communication and transparency among all JV partners. Establish regular reporting mechanisms to keep all parties informed about the performance of the investment and any significant developments.
  9. Exit Provisions: Plan for contingencies such as one party wanting to exit the JV prematurely. Outline provisions for buyouts, transfers of ownership, or bringing in new partners.
  10. Legal Documentation: Draft a comprehensive JV agreement that clearly outlines the terms, rights, obligations, and responsibilities of each party. Address key aspects such as profit sharing, capital contributions, management structure, dispute resolution, and confidentiality.

By carefully considering these factors and addressing them in the JV agreement, you can enhance the chances of a successful mortgage note investment partnership while minimizing potential risks and conflicts.