What are Real Estate Joint Ventures
A real estate joint venture goes beyond a standard partnership in the sense that it is a temporary arrangement consisting of two or more people or business entities with the specific goal of acquiring, developing and operating one or several real estate projects. A standard partnership usually involves an ongoing business relationship between two or more individuals or entities.
So, why do investors and developers utilize real estate joint ventures? Such agreements actually date back to Roman times when investors would band together to fund the development of large projects. This concept has been somewhat revived over the past several decades as a new generation of investors have been created with great wealth and experience , but without a greater reach into every market.
In order to maximize returns on investments, these investors are looking at new ways to achieve goals—one of which is to reduce risk. Investors can limit their exposure and risks by utilizing financing options and having another party join them with the knowledge and skills to accomplish the investment goals.
Real estate joint ventures have become popular in recent years because of their inherent benefits. In today’s economic climate, declining value and lack of demand can halt development in an area or involve a large percentage of operating vacant space that creates a cash drain—a major threat to investors.
Components of a Joint Venture Agreement
The core components of a joint venture agreement for real estate typically include the objectives of the joint venture, the expected financial contributions from each of the partners, and the roles and responsibilities of each party. Joint venture agreements often also address financial distributions among partners. In any case, it is important that the agreement detail the rights and duties of each partner (or identified partners) and designates one of the partners as project manager or general partner of the entity created by the agreement. A well-crafted joint venture agreement can go a long way in minimizing the chance of an unforeseen dispute between the partners in the new venture.
Advantages of Real Estate Joint Ventures
Real estate joint ventures are all about strategic partnerships with mutually compatible potential partners. The individual and/or collective outcomes are usually focused on the growth and improvement of a property for more effective marketing. In so doing, each partner must recognize the strengths of the other and find methods to meld those strengths into a financially rewarding outcome.
Risk sharing
Risk in a joint venture is strictly managed through a combination of shared responsibilities (risks) and the rewards involved. For example – Say a property is purchased as raw land with no functional structures in place. The parties share the financial cost of erecting the required buildings to launch a new business. This will, of course, allow for a bigger building project and a duty to share (equally or as noted in contract) any expenses that may be incurred due to changes in the real estate market. There are no stop gaps an individual owner might create through their personal choices.
Combined expertise
Every business relationship or endeavor is a combination of involved parties. In a real estate situation, this might involve:
Shared resources
A real estate joint venture is one that also promotes diversity and expansion of ownership. When partnering with others, assets such as costs, development, and sale potential can be shared in the eventual sale or other divesture of the properties involved. If the parties involved do not have sufficient capital to invest in the real estate, their personal assets can be used to offset additional monetarily based risks.
Challenges in Real Estate Joint Ventures
As with many business relationships, a real estate joint venture can give rise to disputes if not handled with care. Naturally, it’s impossible to foresee every potential issue, although there are several common concerns that may arise and for which you should plan:
Owner Liability – The inclusion of an "indemnification provision" is a common way for partners in a real estate joint venture to protect themselves from liability. Typically, this provision protects one owner from the other’s wrongful or negligent actions.
Operations Issues – Another key provision to include is what happens if one of the owners fails or refuses to follow through on certain components of the deal. For example, you need to delineate what happens if an owner is unable to get financing, fails to meet deadlines or has other operational issues. This goes beyond timing issues related to scheduling or deliverables and relates more to the deal not getting off the ground due to capital challenges, permitting, environmental concerns, etc.
Exit Strategy – You also should have a plan in place for how to end the relationship in the event one party wants to get out of the deal. Failure to address this issue up front could be maddening at the end of the project.
Dispute Resolution – Should a dispute arise, it’s wise to have a process in place for resolving the matter, such as mediation or arbitration, so that it doesn’t involve months in court. In addition to this, you should address what happens in the event of a deadlock – not just in terms of dispute resolution, but in the overall project as well. If you cannot come to an agreement, how do you decide the fate of the project? A simple majority? A keyed vote? Having the project valued by an expert?
Creating a Strategic Joint Venture Agreement
When it comes to drafting an effective joint venture agreement, it is essential to go beyond the basics to really establish the specific terms of the agreement in writing. Of course, the most important thing is to get an agreement down on paper. But once you have that, you should dig a little deeper to create the sort of enforcement mechanisms that can protect your interests down the road. Start with something as simple as the names and qualities of the parties involved, what each party is going to contribute to the deal, and the specific proposed joint venture structure. This should be very basic and easily enforceable information, but it paves the way for more sophisticated terms to be added later. From there, you should define other key terms that could impact your ability to control the property , such as the following: Control Over Decisions Your joint venture agreement should spell out a specific percentage of votes needed for any major decisions and specifically define what is considered a major decision. Distribution of Proceeds and Revenues Put a percentage of the majority owner’s share of distributions into the agreement to avoid any disputes that could arise if the property is sold quickly and without substantial revenues. Sale or Purchase of the Property Include tight guidelines for buying the property from other owners after reaching a certain threshold and include terms that require the group to sell the property if everyone has agreed to it within a certain predetermined timeframe. Financing Clearly define how each party will contribute to financing and the basis for distributions from the profits. Feasibility Studies Specific terms, descriptions and guarantees for the feasability studies, including the scope of work, budget and timeframes should be established. Exit Strategies Exit terms from the agreement are among the final and arguably most important terms to be included in this process, up to and including the situations in which members can be bought out of the deal. It’s always a good idea to have your experienced, knowledgeable attorney draft the joint venture agreement to ensure all the necessary components are covered.
Examples of Real Estate Joint Ventures
Globe St reports that Confluent Senior Living and Harbor Group International sold its 288-unit Timber Canyon Apartments in Colorado Springs to a local buyer for $37M after acquiring it for only $26.6M in March 2015. The joint venture, which specialize in the acquisition and management of senior housing and multifamily assets, attributes the successful execution of their value-added business plan, coupled with February 2017 refinancing, to the increase in worth. Specifically, $2.3M was reinvested in renovations and in unit interior upgrades. Jack Caffey, Vice President with Newmark Knight Frank Multifamily in Denver, represented the companies in this transaction. So whats the lesson here? A stellar business model, a team of highly experienced real estate professionals to execute the plan, and successful refinancing add up to an increased bottom line.
How about a some numbers? A couple of years ago, the Hilton Development Group, headed by Robert Hilton III, partnered with Zacarias Agresti Developments, United Partners Development, Stonebridge Companies, LNR Property LLC, and Archstone in a joint venture to build two, 300-unit apartment buildings in the heart of downtown Union City, Georgia. Uber-luxury apartments may be catching a little flack now, but there is no question they net a pretty penny in the marketplace. Agile planning and adept timing bodes well for smart JVs, as it did in this case. In this heyday even times were a bit tough, but partnerships like this put cash in the coffers. With an estimated market price of $64 million, these two apartment buildings will soon comprise the largest apartment community in south Fulton County, according to Atlanta Magazine. Sure took a lot of partners to execute, but it paid off in spades.
And there are successful joint ventures that don’t result in profit. Another famous case is that of Mall of America parent Triple Five Worldwide Group and New Jersey-based The Lightstone Group, which, on the proverbial heels of the $2.1 billion Mall of America expansion in Bloomington, Minnesota, and their joint venture, Apex Real Estate Development, partnered with Resort World to bring a $6 billion Asian-themed destination resort and casino to the Big Apple, a project demonstrably more complex than the other examples. It had its share of naysayers and skeptics, but its construction began in 2016—two years ahead of schedule—and is slated for completion in 2018. As you’ll read in my follow-up piece on this topic, NJDC recommends heavily a substantial degree of experience gained by participating in earlier similar JVs and entire project experience—done properly, JVs create a new reality for both novice and experienced partners.
Legal Issues in Joint Venture Agreements
For the most part, at least in Florida, joint ventures are not required to be in writing and can be formed by informal agreement rather than by formal documents. However, even with a "handshake," some important legal considerations must be addressed. These include:
1. Regulatory Compliance
When completing government projects, there are myriad regulatory compliance issues that must be addressed and memorialized in appropriate joint venture documentation. For example , joint ventures bidding on government contracts often will need to satisfy Small Business Administration ("SBA") regulations, bonding requirements and/or The Davis Bacon Act (prevailing wage laws).
2. Dispute Resolution
As with any business, disputes will arise in joint ventures and it is essential that the joint venture agreement address how disputes will be resolved, i.e., mediation, arbitration, litigation, etc.