Some real estate ventures only need one person – they can handle the money and the management, and they have the know-how to run everything (or they think they do). Some real estate ventures are projects for individuals. And some are not. Larger real estate projects: multi-family units, multi-lot purchases, or purchases of vacant land, may require more than one person or entity to join together. These joint ventures are a great way for everyone to come out ahead, but they require documentation for everyone’s protection.
What is a Joint Venture?
Let’s start with the basic question – what is a joint venture? A joint venture is a partnership between two or more people or entities. It is different from a regular partnership in one key aspect – beyond the venture, the partners are free to explore any other opportunity. Joint ventures are partnerships only in the project that they are taking up together. This leaves partners free to join other joint ventures, even if they may be in competition or in the same industry.
What are the key roles in a joint venture?
There are two key roles in a joint venture, though they may be filled by more than one entity. The first is the money source. This is the person, entity, or group that funds the venture. That could mean securing a loan or investing their own money and it could mean as little as $200,000 or as much as $20,000,000. How much money you will need is obviously dependent on the project.
The second key role is the management. However, this role can take on several forms. It could mean management of construction, either new construction or renovation, or management of a property (leasing and selling). It could also mean bringing in more specialized skills if they are needed. When you are financing the project, it is important that you vet the managers to ensure that they have the qualifications needed, and that they have the skillset to bring the project to fruition.
What paperwork does a Joint Venture need?
At the very least, a joint venture should have a Joint Venture Agreement or JVA. A JVA is a contract and it spells out the terms that the parties will be governed by; it spells out how the joint venture will operate. As such, it is a very important document. In the case of a real estate joint venture, it can specify key details, such as who will hold the property, and what authorizations are needed to make purchases or sales. An important clause to consider is whether one party or another is limited in the other ventures they can take part in – particularly, competing ones. Can a project manager manage multiple joint ventures or must they focus exclusively on this one?
Many investors into joint ventures want payback clauses, that state that they get a larger percentage of profits until their initial investment (or another amount, sometimes larger) is returned to them. While common, it is important that this arrangement be in writing and agreed to.
If the joint venture will include a separate LLC being formed, then that LLC should also have an operating agreement, which lays out how it will be governed. In particular, it should detail the management of the LLC, and the audit rights of the partners. We have written on operating agreements before, and they are always an important part of a venture. In a joint venture, the JVA can be part of the operating agreement, but it may also make sense to keep it separate.
What are some risks in a Joint Venture?
A very important point to keep in mind is that no title company will think to ask for a JVA – if the property is held by an LLC, they’ll ask for the operating agreement. If one party is holding the property, they may never know that another entity needs to sign off on a sale. Another big risk is mismanagement, especially of money. While you should be doing business with people you trust, you should also ensure that you have the ability to audit the financials periodically – at least once per year but possibly even more frequently, depending on the situation. This ensures that if there is any suspicious activity, you will catch it.
Another big risk in real estate joint ventures is cost overages. Finding creative ways to minimize those is essential, especially when the project may run months or years before turning a profit. By working together, the partners can try to keep costs low and find ways to eliminate waste. Joint ventures are common in real estate, as skilled professionals team up with financial partners to make large projects happen. And while they are not without risks, skilled partners will find the effort is well worth the reward. We can assist you in structuring a joint venture to protect your interests and to ensure that everyone gets what they have earned. Whether it is preparing a JVA or creating a multi-level structure, we work with you to find the best option for your deal – not just a cookie-cutter approach, but custom designed plans for what you need. If we can help you, please call us to set up a free consultation.