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.

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.

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.

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.

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