Need a legal advice for a silent partner in townhouse development

Hi dear,

We have a family business operated as Unit Trust. With our Unit Trust we are conducting a townhouse development project. Now we have a friend who wants to inject certain amount of finance into our project, in return we will give him some of the profit from the townhouse development. We are just wondering what sort of business relationship we should set up with the friend. The townhouse development project will be operated as below:

• · The development site is purchased under our Unit Trust
• · The construction loan is borrowed under our Unit Trus
• · We operate and control the hole process of the project

Our friend does not involve much in the project and is silent. So what sort of legal document we need to sign with him to show we will give him certain percentage of profit to him according to his finance contribution.

It will be much appreciated if someone can give us some advice about this situation.



Regards

Ming

 

Hi Ming, welcome to PC.

People here can give you plenty of opinions, but none will be relevant without all the facts.

@RPI is a well respected member on this forum, I'd suggest contacting him directly to see if he can help. In any case, be prepared to pay for proper legal advice.

My personal preference is to not mix friendships and $$$...

 

If it is a unit trust the legal interest will be represented by the number of units each person has in the unit trust and the trust deed will govern the relationship.

Seperately to that you should have a unit holders agreement to determine how the unit holders will deal with each other. That could include a discussion on representation at meetings and the level of interest/access a "silent" investor can take.

Before a unit holder agreement is planned I like to do a business plan with forecasts for the development. This is a good way of identifying how much money is needed upfront, how much will come back and how long it will take.

The agreement should also consider what happens if a shortfall occurs. Is the silent investor exposed for more or is their liability simply capped? A discussion on the bad outcomes upfront is a great idea. I also like to see how people deal with conflict before the deal starts because conflict will surely happen when it is going full steam ahead.

If one person is operating as a director, or having an active interest in the development, the unitholder agreement should acknowledge the additional remuneration a person will take from the development.

This is a complex issue and it varies depending on how the development will pan out. Great advice with care and empathy is needed.

 

I guess there are 3 or 4 ways to do it.

a. trustee borrows money from him and pays him interest
b. he buys units in the unit trust
c. he enters a joint venture agreement with the trustee

He will need legal advice on the implications of each of the above including advice on the stamp duty consequences. He should also get tax advice as should the trustee.

 

Simple matter like an absolute right of redemption or a trustee discretion can make massive differences when a dispute arises. If I was a unitholder I would want to be certain about what "profit" means too..eg Can the trust pay related parties for expenses ? Who will be trustee / Directors ? If there is a deadlock how is it resolved ?

Changes to unitholdings in a QLD UT arent good as duty gets triggered BUT provided there arent any changes then thats less a concern.

One aspect is a concern ....We have a family business operated as Unit Trust. With our Unit Trust we are conducting a townhouse development project. How does that work for the other person when you blend business and property ? Asset risks ? Might be better as a loan.

 

I took that to mean the development was the 'business' - but Ming is there a separate business being operated by the same trust?

 

Terry and Paul have a good point.

The starting question is what structure is best for you. I think the question as to how to structure the deal with a silent investor should be after how you operate.