How to split a joint venture deal when using a transactional lender

Understanding the transactional lender's role

A transactional lender provides short-term funding, typically for a double close, allowing you to buy a property and immediately resell it to a cash buyer. This lender is not a joint venture partner in the traditional sense; he or she is a service provider whose capital enables the deal to close. His or her compensation is a fee for the use of that capital, not a share of the deal's overall profit.

The lender's role is to bridge the funding gap between your purchase from the seller and your simultaneous sale to the end buyer. This arrangement helps you close quickly and without using your own cash, but it comes with a specific, agreed-upon cost.

When to bring a transactional lender into a JV

You bring in a transactional lender when a JV deal requires a double close, and neither you nor your JV partner has the cash to fund the initial purchase. This is common when the seller is unwilling to sign an assignment contract, or when you want to keep your assignment fee undisclosed to the end buyer.

Discuss this need with your JV partner early in the process. Ensure both parties understand the additional cost this will introduce to the deal. It is an expense that will come out of the gross profit before any partnership split.

Calculating the lender's fee

Transactional lenders charge a flat fee or a percentage of the loan amount, often with a minimum fee. This fee is typically paid at the closing of the second transaction. For example, a lender might charge a hypothetical 2% of the funds borrowed, with a minimum of $2,000.

Factor this fee into your deal analysis from the beginning. It reduces the net profit available for you and your JV partner. Always get a clear, written fee schedule from the transactional lender before committing.

Structuring the JV profit split

The most straightforward way to split a JV deal with a transactional lender is to treat the lender's fee as a deal expense. This means you subtract the lender's fee, along with other closing costs, from the gross assignment fee or spread to arrive at the net profit. Only then do you split the remaining net profit with your JV partner.

For instance, if your gross assignment fee is $10,000 and the transactional lender charges $2,000, your net profit before your JV split is $8,000. If you and your JV partner have a 50/50 agreement, each partner would receive $4,000. This ensures the cost of funding is borne by the deal itself, not disproportionately by one partner.

Be explicit in your JV agreement about how all deal expenses, including transactional lender fees, will be handled. This prevents misunderstandings when it comes time to distribute profits.

Documenting the agreement

A clear, written joint venture agreement is essential. It should detail the responsibilities of each partner, the capital contributions, and the method for calculating and splitting profits after all expenses. This agreement should specifically mention the transactional lender's fee as an expense to be deducted.

While a transactional lender is not a JV partner, his or her involvement impacts the financial outcome for the partners. Documenting how that cost is handled protects all parties and ensures transparency. This is not legal advice; consult with an attorney to draft your JV agreements.

For more on agreements, see our guide on /learn/what-documents-do-i-need-for-an-assignment-of-contract.

Potential pitfalls to avoid

One pitfall is not fully disclosing the transactional lender's fees to your JV partner upfront. Hidden costs can erode trust and complicate the partnership. Another is failing to factor the fee into your initial offer to the seller, which can shrink your profit margin unexpectedly.

Always confirm the transactional lender's ability to fund before you go under contract with the seller. A funding delay from the lender can kill the deal or push out closing dates. Understand the process for /for/wholesalers looking to do these deals.