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Why Co-Investing Can Improve Getting Access to Finance - March 2021

By Guest Blogger: Peter Faludi, Peter Faludi Consulting

 

 

Funding an acquisition or project can be difficult.

For many buyers, the difficulty and stress in getting finance on reasonable terms is a close second to the stress of finding the right property.

In the case of buyers of commercial or development property, this stress can be reduced by co-investing with others.

Although this can also be done when buying residential property as an investor or owner occupier, the relationship between the parties may make this difficult. Potential for disputes between such parties and their hesitancy to properly document their co-ownership arrangements may make co-investment more problematic in respect of such acquisitions.

In this article I highlight some of the benefits and pitfalls of investing in commercial and development projects with other investors.

By working with other experienced investors/developers, you can derive a number of substantial benefits which will improve your ability to obtain funding, but (as always) beware of the traps.

Benefits

The benefits include:

  • Greater capacity to raise the equity required by third party financiers,
  • The ability to leverage off the experience of other investors in carrying out the project,
  • Improved access to funding options and quality contractors/consultants due to a broader range of group contacts, and
  • Minimising and sharing the risks associated with the project.

What you need to consider

When seeking co-investors, you need to consider a number of significant matters, including:

  • Do you and each of the proposed co-investors have the same objectives in relation to the property or project? This should include ascertaining how each investor is likely to approach potential problems associated with the property or project.
  • Do the proposed co-investors have the experience and financial backing that you have assumed or been advised of?
  • What ownership structure should be established to implement the co-investment?
  • Are all parties willing to properly documents the co-ownership arrangements?
  • What happens if any co-investor does not fulfil his/her/its obligations in relation to the property or project, and
  • How are decisions in respect of the property or project to be made?

We have been involved in a number of matters where there was a large divergence between what each party wanted to contribute to the project and their level of participation. These matters need to be addressed at the very beginning of discussions so as to not waste time in trying to resolve fundamental differences.

Importance of documenting the relationship

Properly documenting the relationship (be that a joint venture or the contribution of capital to a trust or company), is essential to minimise disruption in completing the project.

The document should provide a road map as to how to deal with issues arising in respect of the property or project.

We have been involved in matters where were it not for the terms of the relevant document, a lengthy dispute would have arisen over the payments to be made to each party on completion. The difference involved millions of dollars.

In addition to the above benefits to the parties, having a good co-investor document will generally be required by any third-party financier as a condition precedent to funding..

Bottom line

If you are able to find co-investors with the right mind-set, experience, financial capacity and networks, co-investing with them can make a large positive difference to your ability to fund an acquisition or project.

BUT, if you are uncomfortable on any of these aspects, the benefits may not be realised.

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If you would like to learn more about the above please feel free to make contact or connect with me.

Peter Faludi Consulting - Call  0401 500 528 or Email  peter@peterfaludiconsulting.com.au

Connect with me on LinkedIn - https://www.linkedin.com/in/peter-faludi/   

Subscribe to our Website - https://www.peterfaludiconsulting.com.au

The comments made in this Article do not constitute the provision of any legal, tax or accounting advice by Peter Faludi Consulting or any Director or employee thereof and therefore you should not rely on this Alert in making any decisions relating to present or future transactions in which you are involved. We strongly recommend that you seek legal, tax and/or accounting advice (as relevant) in relation to the same.  

 Copyright © Peter Faludi Consulting. All rights reserved.

 

 

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