Tuesday, July 28, 2009

Warning: A Joint Venture Disguised as a Loan

First I want to disclose that I am not an attorney and that you should consult an attorney when you form a business entity, sell shares, enter partnerships, etc. With that out of the way, I here are some observations about an opportunity I received to "borrow" money that turned out to be a joint venture with a business partner and that needed to be bought-out five years down the road.

The Offer

I received an e-mail about three weeks ago with the following offer to borrow money:

  • $300 application fee, refundable if loan did not go through
  • 100% LTV using a CMA or BPO, no appraisal needed
  • 3% interest-only, 5 year term
  • Letter documenting cash equal to 20% of loan is available in a financial institution
  • Loan to be paid back in 5 years, with an option to convert to a conventional 30-year loan at 5% interest
  • 30 days to underwrite and fund

Sounds to good to be true, right? As usual, there was a lot more to this than initially presented.

The Reality

The reality is that the “loan” became a four page “Joint Venture Agreement.” The exit strategy to the “loan” was paying-off the joint venture partner or taking him on as a permanent partner with a 50/50 split.

I talked to two attorneys, one a real estate attorney the other a securities attorney. Both told me that a “Joint Venture” is a general partnership, which means that both parties become liable for actions of the other party.

When I questioned becoming a general partner with a “lender” the response was “This is not a general partnership, just look at paragraph 5.” Well, paragraph 5 says:

“Neither the Joint Venture nor any of the Parties shall have authority to create any obligation for one or more of the other Joint Venture partners.Neither the Joint Venture nor any of the Parties shall be responsible or liable for any indebtedness or obligation of the other Parties, individually or collectively, incurred either before or after the execution of this Agreement.

In other words, forget hundreds of years of statutory and common law, we are going to agree that we are not liable for each other. Sorry, but you cannot make your bad breath go away by simply stating that it doesn’t exist!

The Bottom Line

Is this a "scam?" I don't know if it is a way to take your money, your property, or both. It could be totally legitimate. What I do know is that it was very poorly executed and that it is a securities transaction regulated by the State of Utah and the SEC. As my lawyer, Kevin Timken has taught me, be very careful of business transactions involving entities and borrowing or lending money. They are very highly regulated and occur even when you are not aware of them.

I signed a confidentiality agreement so I won’t disclose who these people are.

Two lessons learned:

  1. If it sounds too good to be true, it probably is. (Not a new lesson, but definitely reinforced.)
  2. By very cautious with any money making scheme coming out of Provo orOrem, Utah.

Have you heard about a loan program like this? Do you know of any other incredible “business opportunities” circulating right now that others should stay away from?

1 comment:

  1. Your right David, Provo & Orem seems to be the real estate fraud center of Utah and I really don't know why?