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Apartment Loans Secrets
Last updated on Feb 19, 2023
3 min read
by Content Team

3 Best Practices for Joint Ventures

Three practices to help ensure a successful joint venture.

In this article:
  1. Joint Venture Best Practices
  2. 1. Choosing the right partner is crucial.
  3. 2. Delegate responsibilities carefully.
  4. 3. Take caution regarding conflicts of interest.
  5. Related Questions
  6. Get Financing
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While a single investor owning 100% of an asset is very common, many apartment assets are the products of joint ventures. In most joint venture ownership structures in the multifamily sector, one operating member — often an experienced investor, property manager, or developer — takes lead on the management of the asset. Capital members, on the other hand, usually have a less active role, though this mostly depends on the details of the joint venture agreement. Regardless of the terms of a joint venture agreement, there are several best practices that JV partnerships can employ to boost their chances of success.

Joint Venture Best Practices

Joint ventures can be extremely lucrative for all parties involved, but they aren’t without their fair share of risks. Without proper planning, a joint venture can transform into a sinking ship, and partners — particularly the capital member or members — risk losing valuable investment capital and sometimes even become exposed to serious liability. In order to reduce some of the risks involved with a joint venture partnership, investors may want to consider following some of the best practices listed below:

1. Choosing the right partner is crucial.

Partnering with the wrong entity can sink a joint venture, while choosing the right partner can be a major catalyst of the joint venture’s success. It’s essential to make sure that members of the partnership are aligned regarding ethical business practices, risk tolerance, timeliness, and other key factors. Of course, the scope of contributions and roles of potential partners (or firms) is also of great importance — so it is imperative that potential partners are vetted for having the operational experience, manpower, and/or capital to get the job done.

2. Delegate responsibilities carefully.

Even though it’s essential to vet potential joint venture partners, it’s still critical to have a frank discussion with potential partners about who will do what and when. Delegation of responsibilities before signing a JV agreement is crucial not only for a more seamless project environment, but there will also be significantly fewer misunderstandings between partners as the project matures. It’s especially important that the operational member has a full understanding of its role and how to execute its duties to the benefit of the venture.

3. Take caution regarding conflicts of interest.

It isn’t uncommon for members of a joint venture to own, be a part of, or have affiliations with pertinent entities such as property management firms or general contractors. In many cases, they may push for these entities to do a significant amount of work involving the venture’s assets. From an investment standpoint, this may sound as a great opportunity to save on costs, but in some cases, what may benefit these affiliated companies may not be best for the performance of the investment. It is usually best to keep affiliated companies out of JV dealings to prevent potential conflict between members born from issues involving these affiliated entities.

Related Questions

What are the benefits of joint venture financing for commercial real estate?

Joint venture financing for commercial real estate can provide a number of benefits, including access to capital, reduced risk, and cost savings. By pooling resources, joint venture partners can access larger amounts of capital than they would be able to on their own, which can help them finance larger projects. Additionally, by sharing the risk of a project, joint venture partners can reduce their individual risk exposure. Finally, by leveraging the expertise of the operating partner, joint venture partners can often save money on development and management costs.

What are the risks associated with joint venture financing for commercial real estate?

Joint ventures can be extremely rewarding for all parties involved, but they also come with certain risks. Without proper planning, a joint venture can easily be a sand-trap, in which one (or both) parties can lose valuable investment capital and even expose themselves to serious liability. Some of the risks associated with joint venture financing for commercial real estate include:

  • Choosing the wrong partner can sink a joint venture, while choosing the right one can help it skyrocket to success. It’s essential to make sure that both partners are on the same page involving ethical business practices, risk tolerance, timeliness, and other important factors.
  • In many cases, the operational member of a joint venture may also be a property manager or a general contractor, and, in many cases, they will be using their own company to do a significant amount of work involving the property. While this can lead to cost savings, in some cases, what benefits these affiliated companies may not be best for the performance of the investment.
  • Natural disasters, ‘acts of God’, lawsuits and other unforeseen events can easily derail a real estate investment or development project.

To try to ensure that your joint venture partnership goes off without a hitch, you may want to consider following some of the best practices listed in the Joint Ventures in Commercial Real Estate article.

What are the most important factors to consider when forming a joint venture for commercial real estate?

The most important factors to consider when forming a joint venture for commercial real estate are:

  • The plans and goals of the joint venture: This part of the agreement should detail the property that the JV plans to develop/acquire, and how will they do it.
  • How much each party will contribute to the venture: In most cases, a capital partner or partner(s) will contribute the majority of the capital to a project, while the operational partner will contribute a smaller stake. However, in some cases, the operational partner will not contribute anything, while the capital partner contributes 100% of the required capital. In addition, the joint venture agreement should clearly state if the venture plans to take out a commercial real estate loan, and, if so, for how much.
  • Profit splits/management responsibilities: The agreement should detail exactly how profits are split. In many situations, the operating partner will take in a larger share of the profits due to their additional management responsibilities. They will often be compensated in the form of a waterfall/promote structure, in which they will receive a proportionally larger share of the profits (called a promote) should the project exceed certain profitability hurdles. In addition, the operational partner will typically be awarded certain fees.
  • Long-term ownership rights: The agreement should also detail who will be able to own the property after the primary investment period is over. For instance, if the operating partner has a significant ownership stake, the capital partner may have the right to buy his stake after a certain period.
  • Exit strategies: The exit strategy should detail the estimated timeline for the project exit, how it will be done, and under which circumstances a party can exit the agreement early.
  • Contingencies and how various emergencies will be handled: Natural disasters, ‘acts of God’, lawsuits and other unforeseen events can easily derail a real estate investment or development project. However, having certain structures in place may be able to reduce risk and prevent a bad situation from getting worse.
  • Be careful when selecting a partner: Choosing the wrong partner can sink a joint venture, while choosing the right one can help it skyrocket to success. It’s essential to make sure that both partners are on the same page involving ethical business practices, risk tolerance, timeliness, and other important factors. Of course, you’ll also need to make sure that a potential partner (or firm) has the operational experience, manpower, and capital to get the job done.
  • Delegate responsibilities carefully: While having a detailed joint venture agreement is important, it’s still important to have a frank discussion with potential partners about who will do what and when. That way, there will be significantly fewer misunderstandings if you actually end up working together.
  • Be careful about conflicts of interest: In many cases, the operational member of a joint venture may also be a property manager or a general contractor, and, in many cases, they will be using their own company to do a significant amount of work involving the property. While this can lead to cost savings, in some cases, what benefits these affiliated companies may not be best for the performance of the investment. For instance, it might not benefit the operating member’s property management company if a property is sold, even though it would be best for the joint venture. Therefore, it’s important to stay aware of potential conflicts to make sure they don’t cause any serious issues.

What are the best strategies for structuring a joint venture for commercial real estate?

The best strategies for structuring a joint venture for commercial real estate involve careful selection of a partner, delegation of responsibilities, and awareness of potential conflicts of interest. The most common structure for a joint venture is a limited liability company (LLC), but other options include partnerships, corporations, and other structures. It's important to choose the right structure for a project's individual needs, as the structure can have a big impact on the rights and responsibilities of (and the power dynamics between) members. Additionally, a joint venture agreement should be signed that details the plans and goals of the joint venture, how much each party will contribute to the venture, profit splits/management responsibilities, long-term ownership rights, exit strategies, and contingencies and how various emergencies will be handled.

What are the most common mistakes to avoid when forming a joint venture for commercial real estate?

The most common mistakes to avoid when forming a joint venture for commercial real estate include:

  • Be careful when selecting a partner. Choosing the wrong partner can sink a joint venture, while choosing the right one can help it skyrocket to success. It’s essential to make sure that both partners are on the same page involving ethical business practices, risk tolerance, timeliness, and other important factors. Of course, you’ll also need to make sure that a potential partner (or firm) has the operational experience, manpower, and capital to get the job done. Source
  • Delegate responsibilities carefully. While it’s important to have a detailed joint venture agreement, it’s still important to have a frank discussion with potential partners about who will do what and when. That way, there will be significantly fewer misunderstandings if you actually end up working together. Source
  • Be careful about conflicts of interest. In many cases, the operational member of a joint venture may also be a property manager or a general contractor, and, in many cases, they will be using their own company to do a significant amount of work involving the property. While this can lead to cost savings, in some cases, what benefits these affiliated companies may not be best for the performance of the investment. For instance, it might not benefit the operating member’s property management company if a property is sold, even though it would be best for the joint venture. Therefore, it’s important to stay aware of potential conflicts to make sure they don’t cause any serious issues. Source
  • Choose the right ownership structure. A joint venture can be structured in several different ways, with a limited liability company (LLC) being the most common. Other options include partnerships, corporations, and other structures. However, it’s important to choose the right structure for a project’s individual needs, as the structure can have a big impact on the rights and responsibilities of (and the power dynamics between) members. Source
In this article:
  1. Joint Venture Best Practices
  2. 1. Choosing the right partner is crucial.
  3. 2. Delegate responsibilities carefully.
  4. 3. Take caution regarding conflicts of interest.
  5. Related Questions
  6. Get Financing
Tags
  • capital markets
  • apartment investing
  • apartment finance
  • jv
  • joint venture
  • multifamily investing

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