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.