How a Joint Venture in Real Estate Works?

 How a Joint Venture in Real Estate Works?

Real estate investing involves a lot of individual goals, so teamwork is often overlooked when real estate investors want to scale their business. A joint venture in real estate investing is a way for investors to put their money, experience, and expertise together to accomplish more than they could on their own.

What is a joint venture (JV) in real estate?

A joint venture in real estate is two or more parties that combine resources for a specific development or investment. The parties in a joint venture maintain their own business identity while working together to complete a deal.

The responsibilities in a joint venture can be assigned in whatever way is needed for the particular project. The profits are also shared however the parties agree.

Two developers might do a joint venture to complete a project that's too large for either of them to take on by themselves. Or a real estate investor might partner with someone who has the money to fund a deal that the investor isn't able to close on their own.

Examples of joint ventures used in real estate

Joint ventures are used when two or more parties need something the other has to get a deal done. This can be any number of things, including cash, credit, experience, or assets.

It's common for one investor to have a great deal lined up along with the experience to manage it but need a private equity partner to make it happen. That's one common joint venture situation. There are many others that involve more than the need for money.

- Land contribution
An investor may be sitting on a piece of commercial real estate knowing that somebody with the ability to develop it will show up at some point. The investor may not want to sell the land to the developer. Instead, they might want to participate in the development by contributing the land to the deal.

In this case, the investor has the asset the developer needs and the developer has the ability to develop the land. Each party has something the other needs, so they form a joint venture.

- Construction management

An investor may come across a development opportunity but lack the expertise to manage a construction project. Instead of hiring somebody to handle this, the investor may find a real estate developer to partner with who's experienced in the particular type of project at hand.

- Credibility

A new developer may have the cash, credit, and expertise to get a project done, but challenges may arise with getting investors involved because they haven't established credibility in the industry. They may choose to put together a joint venture agreement with another reputable developer to get the needed capital.

- Credit
A real estate investor who has enough cash for the down payment and the experience to manage an investment may not be able to get a loan on a property due to poor credit. This investor might seek out a joint venture with an individual or entity with the credit needed to get financing on the property.

These are just some basic examples of how a JV might be used. There's no limit to the ways two or more people can work together to make an investment happen.

How are real estate joint ventures structured?

A joint venture is similar to a partnership in many ways, but they're not the same. Multiple people form one entity to conduct business together in a partnership. With a joint venture, each party continues to do business under their own entity. The joint venture partners are just working together on a specific deal or project.

A joint venture can take on a number of different legal structures depending on the deal. However the parties choose to structure it, there will be a joint venture agreement in place that specifies each party's contributions and responsibilities as well as how profits will be distributed.

The joint venture partners might split any profits based on an agreed percentage, or there may be a preferred equity situation.

Key Aspects of a Real Estate JV Agreement

A real estate JV agreement involves the following factors:

- Distribution of profits
An important distinction to make when drafting the terms for a joint venture is how the members will distribute profits generated from the project. Compensation may not necessarily be equally distributed. For example, more active members, or members that have invested more into the project may be compensated better than passive members.

- Capital contribution

The JV agreement needs to specify the exact amount of capital contribution expected from each member. 

- Management and control
The JV agreement is expected to specify in detail the exact structure of the JV and the responsibilities of both parties regarding the management of the Real Estate JV project.

- Exit mechanism
It is essential for a JV agreement to detail how and when the JV will end. Usually, it is in the best interest of both parties to make the dissolution of the JV as economical as possible (i.e., avoid legal fees, etc.). In addition, the JV agreement must also list out all the events that might allow one or both parties to trigger a premature dissolution of the JV.

Reasons to Form Joint Ventures

Real estate development partners enter into joint ventures for the following reasons:

- Complements
Managing partners bring industry expertise and put time and effort to manage the project, while limited partners provide the capital required to fund the project.

- Incentives
Managing partners are often provided with disproportionate returns to keep them motivated to work hard.

- Structures
Investors possess limited liability and liquidation preference in the case that the assets of the partnership are liquidated.


Other Uses of JV Agreements

A joint venture agreement also enables businesses to take part in investment projects that they normally would not be able to join. Primarily, it allows a company to invest in projects in other countries by entering into a joint venture with a local partner. In this case, the company may either be the operating partner or the capital partner.

Many countries impose restrictions on foreigners entering the domestic real estate market. In such cases, setting up a joint venture agreement with a domestic company is often the only avenue into the country.

Advantages of a joint venture in real estate

Joint ventures allow multiple people, or businesses, to combine their resources to complete a deal. Each party involved may lack the experience, expertise, or capital that the other has. They're able to get deals done by working together toward goals they wouldn't be able to achieve otherwise. It often makes sense to give up some equity in an investment if it will allow you to get the deal done and grow your real estate portfolio.

Joint ventures also have a benefit over partnerships because each party continues to operate under their own legal entity.

Benefits of a joint venture in real estate

- Shared resources.
- Access to additional capital.
- Shared expenses.
- Shared risk.
- Access to additional knowledge and expertise.

- Added credibility.

Disadvantages of a joint venture in real estate

Of course, there's not one perfect way to develop or invest in real estate. It's always necessary to weigh the pros and cons of each strategy as it relates to the deal.

Some developers and investors have a hard time working with other people. Some people like to be in control of every situation while others have a hard time making decisions.

Drawbacks of a joint venture in real estate

- Lack of total control.
- Less equity.
- Shared profits.
- Potential disagreements.
- Conflict-resolution challenges.
- Obligations potentially unfulfilled by the other partner.
- Project terms not clearly defined.

You need to be cautious of who you choose to enter into any type of partnership with. Business practices and personalities can clash, and any animosity can put the deal at risk.

It's always a good idea to work through the joint venture agreement so as to cover any potential issues you didn't think of. Running into issues after the agreement is signed can become a big issue.