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.
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.
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.
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.
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.
A well-connected real estate professional may have a relationship with a quality tenant who needs a build-to-suit lease but lacks the means to make it happen. This presents an opportunity for a joint venture with an investor or developer who can provide the building to the tenant.
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.
Limited Liability Company
A limited liability company (LLC) is probably the most common entity used for joint ventures. Setting up a business as an LLC is relatively easy and inexpensive. The terms of the JV agreement are spelled out in the LLC operating agreement.
Each party in the joint venture will be a member in the LLC, owning a certain percentage of the membership interest.
LLCs are attractive because they provide liability protection to the members.
Corporations are primarily used for more complex scenarios or when a very large amount of money is involved. The corporation can be either a C Corporation or an S Corporation. Both types of corporations offer liability protection for the joint venture partners.
The specific structure of the JV agreement is spelled out in the corporation's bylaws. Each partner in the joint venture will own shares in the new corporation.
Partnerships aren't used as often in joint ventures as they used to be. However, partnerships do have benefits in certain situations.
The two types of partnerships that are used are general partnerships and limited partnerships. The type of partnership used will depend on the responsibilities of each party.
A general partnership will be used if both parties are actively involved in the development or investment.
A limited partnership is used when one or more of the parties are passive investors, only contributing capital and not playing any active role in the project. The capital partners are the limited partners and have limited liability. The partner who is active in the joint venture is the general partner.
Partnerships typically have more flexibility in their structure. They also have less paperwork and expenses involved in their formation.
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. This can limit each entity's involvement to the specific project they're working on together.
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 with a business attorney to cover any potential issues you didn't think of. Running into issues after the agreement is signed can become a big issue.
The bottom line
A joint venture in real estate is a great way to get a tough deal done. However, you should keep in mind that it's just one way to invest in real estate. Before deciding on a joint venture for your real estate project, make sure it's the best option available to you and that the risks are worth the reward.