As a structuring advisor to investors and business people, one very common mistake with many  business and property structures is a spouse being offered as a guarantor to the banks, landlords or creditors of a business.

Their personal guarantee is often not required to get a deal done, yet it is provided because the advisors around you do not stand up for you and say 'hey, don't let your spouse sign that - you don't need too'. The result is that if total business or investment failure occurs, both spouses are fully liable instead of just one.

Of course the creditor, banker or landlord requesting your spouses guarantee will insist it is necessary 100%, because it is in their interest.

But it is contrary to your interests.

My advice is NEVER give your spouses guarantee in business or property dealings if you can avoid it. I have developed over 80 million dollars in property, and guaranteed numerous business and banking obligations, purchased multiple investment properties, - and my wife has never signed a personal guarantee on the loans.

Why ? To shelter her from the obligations.

How did I avoid her being liable? By saying no to the banks and creditors when they asked. Did it hamstring her legal or matrimonial rights to recover the property if we divorced? No, - she still gets the assets because she jointly controls the Trusts and various entities borrowing. So this is not about stripping power off your spouse and potentially wealth, it is purely about minimising risk to your household.

Examples of this include:-

1. Borrowing money from the bank to purchase an investment property or even your home. If one spouse is a homemaker, has no income or their income is not required to meet debt servicing criteria of the bank, - then why allow the bank to take their guarantee? The only use of the guarantee will be to apply more pressure to your family if you have a problem, and both spouses go bankrupt instead of one ( which could be viewed as malicious in this light).
   
   One point to note here is that you may need to use a mortgage broker to manage the negotiation with the bank, - and the broker will have to work a bit harder to achieve this. If you deal with a bank direct, they will likely tell you 'no spouse guarantee is impossible in your circumstances'. It may be true if your borrowing position is not strong, but how do you know unless you have a lot of banking and commercial experience?
   
   The answer is use a broker who has the experience, and who is willing to try hard for you. I have found many brokers lazy, or unsophisticated - they are just not equipped for these sorts of discussions with bankers or do not value asset protection concepts. Remember they get paid on commission, and asking for tough things from the bank means more work and time for the broker, with no more money. For this reason it may be appropriate to pay your broker to deal with the complexities, if your affairs are complex. Otherwise they may put you in the 'too hard' basket. If you need a good broker, email me mg@gra.co.nz . We have contacts all over the country, and for the record we do not get commission from these relationships. We just want our clients better protected.

2. Dealing with landlords over commercial leases and guarantees: always try to divide leases out into separate 'tenancy companies' and make one spouse a director of this company, Your opening position should be no personal guarantee, and if 'no personal guarantee' is a deal breaker with the landlord, - then only the director/one spouse gives a guarantee. Try not to give an unlimited guarantee, - limit it to say 6 months rent, or a fixed sum as a cap.
   
   For example my rent is around $260,000 per annum for our premises, on a 3+3. If I guarantee it for an unlimited amount, that is a $780,000 personal obligation. Firstly, I limited the guarantee to 6 months rent ( $120,000) and secondly made sure that the shareholders (a Trust) and my spouse did not guarantee the loan. This turns a potentially disastrous obligation into a manageable commercial obligation.

3. Dealing with creditors over personal guarantees: creditors in business will generally ask for a personal guarantee. Refuse to give it if you can get away with it, and most of the time you can. Where you have to give one, just as with a landlord 'limit the guarantee'. Only this week I was arranging some advertising with Fairfax, and they asked me for two GRA directors personal guarantees over the obligations of our supply relationship with them for advertising. I was so annoyed, I told the salesman I did not wish to advertise with Fairfax if a personal guarantee was required. I told him clearly his company's view was that my company was unreliable in character, if they were not willing to deal with the company without the director's guarantee.
   
   He got the message - I really cared more about the guarantees than the advertising and they would not get our money unless they backed away from the guarantees. He rang later to advise the guarantees would not be necessary. To my knowledge, GRA directors have not guaranteed a single supplier obligation (apart from the limited guarantee to the landlord). So it can be done, but I do acknowledge that some suppliers just won't deal with you without providing a personal guarantee.

Summary

Keep your spouse out of the liability chain if you can. Personal guarantees and spouses should not mix.

If you are dealing with a landlord or creditor in business and have to provide a guarantee, try not to give a guarantee at all, or limit the guarantee to a fixed sum Eg: 6 months rent.

If your spouse has no income, you should be able to avoid their guarantee being given to the bank. Consider using a mortgage broker to achieve this. Generally the banks (if dealing direct) will be very hard to manage on this point, especially in this recessionary environment.

I hope you have found this information helpful.  If you require assistance with any financial matters, please fell free to request an interview.  We are here to help.

Have a good month!

As I have said on several occasions, property and stock markets react much faster than local businesses to the bad news.

The property sector and stock market wear the downside of recession very quickly, as does the entire supply chain underneath these sectors of the economy.

But right behind them are the rest of the economy, tightening the belt off tight credit and fear driving reduced consumption.

The whole of 2008 and the first quarter of 2009 has been about falling/bear markets, fear and deleveraging. Deleveraging leads to rapid devaluing of assets, because there are so few buyers relative to sellers. This will continue in my humble opinion for all of 2009 and 2010, though the biggest drop in the markets has occurred and we are approaching the floor in property markets in my view this year / right now.

2011 ( world Cup Rugby Year for NZ ) in my view is the year we will start to see it turn and 2012 will be a growth year. If I am correct in this, then we are ½ way through this nasty patch and there is no hurry to do anything aggressive on the investment front.

Flood of Mortgagee Sales Cued with the Banks

I was told last month that the big 5 trading banks have 2500 properties cued for mortgagee sale, with 12,500 property law act notices cued behind those. ( That’s 15,000 properties on their way to be sold at mortgagee auction.) But the banks are being smart, and not dropping them all on the market at once, - coordinating a release of them on a budget for each bank monthly to protect the market.

If this is true – this is very smart on the banks part and I applaud them for not repeating the mistakes of the 87 and 97 recessions, where the banks drove the market down by flooding the markets with mortgagee sales.

Strangely the biggest villain I hear clients complaining about is BNZ, - their name comes up a lot as a very aggressive banker if you get into trouble. On the positive side, I keep hearing ASB are great to their clients whom are in trouble, - working through their issues constructively.

Banking Horror & Happy Stories

If you have horror stories or happy stories about your bank, I would like to hear them. Email me at mg@gra.co.nz and tell me on a confidential basis.

Opportunity Knocks In Recession

Doom, gloom and continued financial assaults flowing out of America and the World are now so commonplace, they are losing their sting when reported. Relentless media focus has desensitised us, and we now find the extraordinary financial disasters ordinary.

With the shock of it all passing, life seems to be returning to the property markets in New Zealand with March 09’s sales across the county beating any month in 2008. With good reason too – there is significant value to be gained by an informed investor on the hunt and there is a resurgence in finance applications and activity in the market across NZ.

You might have caught the New Zealand Herald’s article on affordability of housing recently, basically showing that for the first time since 2004 in many Auckland suburbs, rent now covers 100% of borrowing costs. ( Looking at average rents over average rental incomes), and if you buy at a discount ( hunt for a good deal), you can find property that pays for interest and all outgoings ( rates, insurance, repairs and maintenance, management, etc) with 100% financing.

This is a function of property values falling, interest rates falling, and rents comparatively holding up. So if you go hunting at present, you can buy a property in Auckland (and around the country), 100% finance it and all cash costs are covered by rents. That means you get the tax refunds on top as a bonus, and the capital gains in the medium term for free!

By the way while I remember, make sure you check out what we're doing in our new Property Procurement Division.  If you like the idea of 'zero cost property ownership, but lack the time to learn and search for the right property youself, then we can help.  There's a lot that can go wrong, and our team has the experience to remove the risk for you.

In my view this winter will be filled with mortgagee sales by banks, bad weather and cold days. Investors tend to get depressed on cold wet days, and not turn up to the auctions. This winter then should reveal some real bargains on those cold wet days in auction houses, and don’t be surprised if you bump into me at a few, - because in this market I am definitely a buyer and I recommend every household start to consider investing against the public mood.

The bargains purchased this year will look very good in 5 years and if you buy right, you will get a huge discount in this environment and positive cashflow all the way through at present.

Happy investing to you.  Go ahead and Request an Interview if you would like a hand getting your taxation and finance arrangements in place with our asset planning team. 

Finally, If you would like to read and comment on more of my articles to designed especially for business owners and investors please visit my blog.

Have a good month!

Partnership Property: Buying Property With Friends & Family

One common theme that seems to be on the 'up' this year, is two or more investors coming together to buy property through small private partnerships, LAQC's or joint ventures.

Common examples include:-

1. Family members buying an asset from the deceased estate of a relative;

2. Family members or friends pooling resources of capital to get enough deposit to buy a property together;

3.  One partner has good cashflow, but no deposit. The other has equity in a home or a deposit, but no cashflow. Together, through a partnership they are bankable and safe investors, ticking both the cashflow and equity boxes and qualifying for finance.

4.  An 'asset rich, time poor' investor agrees to back an 'asset poor / time rich ' investor with skills in property. One funds the other, the other finds the deals. Together they can be a clever investing partnership, combining human and financial capital.

Combining Resources Can Make Sense

Combining resources can make sense for people in various circumstances, but care needs to be taken in setting up a good foundation structure. Any partnership agreement should deal with dispute resolution, and the rights and obligations of partners in advance of the partnership starting. Unfortunately over the years we have seen many a client spoil a relationship with a friend, business colleague or family member through bitter feuds in partnership.

Personally I have found partnerships very powerful and rewarding, allowing me to grow and extend my business and property interests. But in saying that I have seen a few train wrecks emerging in the client base too, with clients very bitter and angry with their business partners.

Partnership Agreement The Key To Avoiding Disputes

I have always found that where a clear partnership agreement is put in place ( for whatever your trading entity form eg LAQC, partnership, or joint venture), problems are less likely to arise because the parties to the agreement know their rights and obligations before they begin. If you like, the time to have the argument is at the start of a new investment or enterprise, rather than 'working out the issues as they arise'.

The latter approach is fraught with risk as to the respective parties view of what is right and wrong, what is fair and reasonable. And when the chips go down....sometimes you learn things about people that surprise you and 'moral agreements', 'handshake agreements', 'gentlemen's agreements', turn out to be disasters...a pathway to hell for some.

What should you think about in your Agreements?

Whether you are going to trade through an LAQC, trading Trust, general partnership, limited partnership, ordinary company, or joint venture.....the story is the same and the arguments that arise are similar.

Typically one party will say ' I am doing all the work ( or more of the work), so I should get all the money'. Another party will say 'I am doing all the funding ( or taking risk through securing bank loans) so I should get all of the money'.

Both parties likely have a point. Resolution lies in agreeing a remuneration formula which addresses both the issues of payment for work done, and payment for risk taken / capital supplied to a venture. By this method you simply agree over:-

1. Payment for work done: The fee for time spent working on the investment portfolio will be an hourly rate of $x, payment by agreed method ( either when the property is sold or week/monthly or as suitable between the parties). Where both parties agree that time spent is equal, they may elect not to draw remuneration. Where time spent is slightly unequal, the parties may agree that the party doing slightly more work will draw for their 'differential work' done. IE If one party does 7 hours work a month and the other 3 hours, then the party doing 7 hours gets paid for 4 hours and that addresses the imbalance.

2. Payment for risk / capital invested: The remuneration for capital invested is interest, paid periodically. By paying interest on partners advances at pre-agreed rates, no partner can claim any grievance for 'doing all the funding / doing more funding' because they have agreed to fund at that rate for the term of the investment. Where the capital is by way of security being provided, it may be appropriate to address the security risk by paying for it. Say your sister puts her house up as security for a loan in a joint LAQC to buy a rental property, pay a guarantee fee. Such fee may be say 5% annually, of the maximum security risk exposure. ( Example: Your sister provides a cross security of 20% for a $300k house purchase by your joint LAQC with her. At 5%, the annual fee is 5% of $60k = $3,000 annually).

Where one party is providing equity, and the other is providing time, it might be appropriate that by partnership you agree that one parties contribution ( time) offsets the other's ( capital risk). By putting numbers into the equation, you can maintain by partnership agreement a common understanding that if time goes up, or security risk goes up, then the imbalance is addressed by more wages paid or more interest or guarantee being paid for the emerging imbalance. This is fair, commercial, and stops arguments in their tracks.

Typical Partnership Agreement Considerations

Your partnership agreement should address the following as part of its scope:-

1. Funding obligations: Who's responsibility is it to fund and to what extent ? Is it based on proportion of entitlement ( pro-rata) or is it unequal ? Consider the funding obligation both in the context of initial advance and ongoing advances for any capital that is required to be injected in the future - what is the obligation to fund by the respective partners and in what proportion at what time frame?

2. Remuneration for time spent by partners: as stated above, what remuneration are you entitled to for time spent working on the portfolio and affairs of the company/partnership, if any. Will you draw the wages, or offset against the other parties contribution ( of time or capital) ? Where time spent is equal, typically no wage is drawn. Remember wages require tax considerations to be addressed so should be avoided if possible.

3. Default of a partner: What will you do if one party cannot pay ? Force a sale or exit from the investment ? If so what penalty should be paid by the defaulting partner ? In some joint venture agreement's I have written, I have provided in the agreement a provision that says the defaulting party loses their capital / shareholder's loan and all shares/units in the investment if they do not pay their dues. This is to stop people 'riding on the goodwill of others'. This is particularly effective between people that do not know each other well, as it provides real incentive to behave and meet obligations without stressing partners. If someone is interested in this concept, contact the writer (mg@gra.co.nz) and I can provide assistance here - this is a great idea that makes your partners behave properly and honorably.

4.  Voting rights and arrangements: generally when partnerships are going well, formalities of voting are irrelevant. But when disputes emerge you should have a clearly defined voting process and your voting rights should be set out. It may by that if you are the partner with the most at stake ( eg you are the funder), then you may require a 'governing directorship', giving you the ability to make unilateral decisions and force your will, if you believe the action of your partners is threatening your capital or security position.

5. Dispute resolution: going to war in court can be expensive. It's best to have a pre-defined mediation or arbitration process that is binding on the parties, or at least an obligation to explore mediation. It's also best to have financial consequences for not following the rules...otherwise there is no incentive to follow them. If something matters to you, define breaking the rule as a 'default' and apply the 'forfeiture of capital' rule in point 3 above.

6. Rights and entitlements / obligations on dissolution of the partnership: When you sell property, sometimes the costs have exceeded the sale proceeds. Who loses and in what proportion ? Should capital advanced rank in front of payment for work done by partners, should interest rank in front of capital gains ? Agree and write it down at the beginning, and you won't have a problem at the end.

7. Restraints: Are you allowed to steal tenants off the partnership, or resources for your own private activities? If not write it down.

8. Exit rights: Partnerships will always end. Someone will die, retire, go broke, remarry, or just have a change of heart. Give yourself the right to exit and stipulate when (at the earliest) this can be, how it will be done, and what penalty there will be for early exit. For example if you agree you will be in an investment for 10 years minimum, and someone exits at year 2 because they have a change of heart, perhaps they forfeit their deposit and shares ? It's up to you - you define the rules the way you want.

Summary

Investing with your friends and family is a powerful way to combine human resource and capital and get a great investing outcome. Make sure you think about what your rights, obligations and profit sharing agreements are. Set rules and consider penalties for rules not being adhered to. Do this upfront and you will be much less likely to have a problem later on when partners circumstances or the investment circumstances changes.

Anyone forming a partnership who would like a hand with the tax or agreement drafting, is welcome to contact me on mg@gra.co.nz

Thank you for reading this.