Need Help with Getting out/Selling My Share of a Joint Investment Property Project

LTheProcess on 07/09/2018 - 21:23
Last edited 07/09/2018 - 23:21

Hi OzB community, I have come seeking some ideas from the best minds our country has to offer re my scenario on an investment property that I have a share in - sorry for the lengthy post. Hopefully the dot point form will help with clarity.

  • I do not have a finance background and work in the healthcare industry, so I apologise in advanced if there are some general knowledge/rules with investment property law that I am unaware of.
  • I decided to invest my savings as a 33.33% shareholder of an investment property 3.5 years ago with a joint intention to develop/subdivide/hold the property of mid term with 2 other friends (1/3 share holder each) under a joint trust company structure - 3 Directors essentially. The other 2 of my friends have CA/Finance backgrounds and said this is the best structure for this project. I follow along…
  • Things are going well overall, property is rented out, decent tenants (unlike some of the other posts here), no real dramas. All 3 of us are still good mates and get along. Each have other investment projects outside of this and contribute to this project in terms of financial/research work etc. equally to the best of our ability.
  • The situation changes. I knew my personal finances would be taking a hit (want to fund the build of my own house to live in) and calculated that it would be very difficult for me to finance this project/loan and decided to plan for it.
  • I notified (in writing) the other 2 directors of my intent, 12 months ago, that I wish to exit this project and sell my share by the desired time frame of 12 months. At the time last year, they stated they wish to continue with the project and will explore ideas for my depature.
  • With my minimal knowledge of of the legal side of things etc, I figured they would simply buy me out or we could sell the investment property to the market.
  • Fast forward 11 months - I remind them of my intent to sell and exit as I will need to put down the down payment for my build soon, they still want to hold the property and there has been minimal progress. We agree that property prices are relatively stagnant (not a good time to sell).
  • Recently, following the advise of my loan broker - I signed the paperwork to formally "resigned" as a director as it will not hinder my chances of getting a new loan to build my personal home.

We are currently in discussions for ideas for me to 'fairly' exit, but I fear that I will be severely disadvantaged (as a minority 33% shareholder) as the other 2 directors (66%) do not want to sell the investment property to the market.

They have suggested I stop financing this project and just dilute my 33% share overtime, amongst other ideas, but I really need the funds for the down payment for my future house, so I have decided after much consideration that I want to exit this project at all costs and sell my share.

My question is, from a legal stand point, what are my realistic options?

  • My feel is that the other 2 directors are content with their 33% share of this project, and to buy my share (and own 50% each) would increase risky and not be financially ideal (especially with stamp duty they will incur). I do not expect them to loose out financially just to satisfy my agenda.
  • Legally, can I go and negotiate with any John Smith I meet, if he is willing to buy my share at an agreed value? And does the other 66% of the company have to accept it? Or is the responsibility to find a new investor on the remaining 2 directors.
  • I fear being undercut, i.e. the property down the road recently sold for 1 million, similar land size and up house condition to the one we own, I've been told to obtain a "fair market value" (which I am in the process of doing), but legally if the FMV comes back at 1 mill (333k share for me) can the other 2 directors forcefully 'negotiate' to buy me out at a value of, say, 800k?
  • What happens if they simply do not want to put more skin in the game and if they don't decide to sell to the market? I hope it doesn't come to this purely out of good will, but is there anyway I can exit this project with my share of the 'gains' and come out relatively unscathed?
  • From discussions so far, the payment of stamp duty involved with buying my 33% share is the major deterrent for the remaining 2 directors to take on my share.

What other options do I have?? Anyone been in a similar scenario that can shed some light and how the scenario played out?

Any help would be appreciated, even if its just informing me of my rights or mentioning any angles I haven't considered. Thanks in advanced!

Financial

Comments

  • ihbh on 07/09/2018 - 21:59

    In coming up with what you think is "fair market value", you need to consider the possibility of the other 2 selling you their share at the value you deem "fair market value" and you taking 100% of the project, and then doing with it as you wish, including selling it on the market.

    There's the added challenge of transaction costs including stamp duty and even capital gains tax.

    Any chance the three of you have any written agreement before you proceeded on the different possible scenarios?

    • TheProcess on 07/09/2018 - 22:14

      Thanks for your response.

      Regarding your comments re FMV, do you mean metaphorically speaking, as in the put myself in their shoes and find a value they cannot resist to buy me out and cut my losses? or actually buy our their 66% share and then sell on the market? If it is the latter, unfortunately I am in no financial position to invest my funds in anything but focus on funding the project which is to my future family house.

      We did not formally sign on any written agreement to liquidate 3.5 years ago, it was more of a 'lets cross this bridge when it comes' mentality. I know… hindsight is a great thing!

      • ihbh on 07/09/2018 - 22:45
        +1

        metaphorically speaking …

        Assuming there was no transaction costs, if you came up with a fair value, then you would be indifferent to selling to your partners or buying from them and then keeping it or selling it on the market. If it took x period to extricate yourself in the case of buying out your partners, not withstanding your focus on your future family home, then you should give your partners this similar consideration in buying out you.

  • try2bhelpful on 07/09/2018 - 22:11
    +4

    Get independent financial and legal advice to minimise the issues here. You really should’ve done this before signing on so there were clauses to cover this. I think diluting your share is a dumb idea unless there is written confirmation on your share when the property finally is sold. Also you need to determine your exposure for liability if the other two default on the mortgage. Best of luck.

    • TheProcess on 07/09/2018 - 22:20

      Cheers mate.

      "I think diluting your share is a dumb idea unless there is written confirmation on your share when the property finally is sold" - Yes, something similar. There were discussions which involved drawing up an agreement to then take my remaining share in the appropriate time frame of the profits. It was fairly attractive proposition as I could then declare the losses in the project and no one had to pay the hefty stamp duty fees. Something that my wife and I have discussed in depth and decided that withdrawing from the project and obtaining my share in funds funds now to pay for the down payment for my new loan is in our best interest.

      I am in the process of seeking professional advice, but I thought I would post here as well as I've always been a lurker for these threads and some of the ideas and angles that the OzB community come up never cease to amaze me.

      • try2bhelpful on 07/09/2018 - 23:40

        I hope it works out for you.

  • TheBilly on 07/09/2018 - 23:23

    Why not just sell even if the market is stagnant you purchased 4 years ago so there is definite equity/capital gain there - explain this to them and say it was a good run now lets move on. Similarly do you all even have the funds to develop this block they want to hold? why would they develop in a down turn and add more risk to their portfolio and potentially diminish what equity they had? professional developers are offloading their blocks like hot cakes. If they are worried about transaction costs, they will have to pay transaction costs if they buy something else anyway, they're trying to avoid an inevitable scenario. If they want to invest in property moving forward at any time in their life they will 100% guaranteed have to pay stamp duty, why are they (profanity) footing on this property now? is it because they dont have the cash for the stamp duty? have you explained to them that they can recapitalise the stamp duty from their existing equity in fhe property as long as they maintain 95% LVR.

    • TheProcess on 08/09/2018 - 10:06

      Thanks for your reply, I think I may have to try and force a majority by convincing one of the other directors to sell. From what you said, I can argue that funds are better invested elsewhere and to avoid the hefty costs and headache of developing.

      Block-quote you purchased 4 years ago so there is definite equity/capital gain there

      Yes, there is definitely a gain, as the block is in an affluent suburb close to PT, schools and a university. I can somewhat see where they are coming from. There are multiple single dwelling developments going on in the streets which property developers we have spoke to state will definitely boost the overall value when completed.

      The other 2 state they are going to make a loss in potential gains if they sell now.

  • Almost Banned on 07/09/2018 - 23:36

    Go to your shareholders or unitholders agreement and trigger the sale provisions.
    I am sure that you made sure that the agreements were in place and covered the eventuality of an early exit, right?
    I am sure that it allowed for an offer or valuation and a right of first refusal - right?
    Then just follow the process.
    Enjoy.

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