In a real estate investment climate dominated by only a few mega-funds it may seem too daunting for individual investors to enter the ring with the industry heavy hitters. However, following the financial crisis of 2008, there has been a proliferation of co-investment opportunities which allow investors to partner with funds that have the capital required to invest in highly profitable real estate ventures.
Unlike investing in blind pool real estate funds, private equity and joint venture partnerships afford you the ability to allocate capital with a much greater degree of control. Other benefits of private joint venture equity include an efficiency in capital use, an improved risk/return profile for the investment, and potentially favorable agreement terms.
Entering a Partnership
If you are looking for outsized returns on real estate investment, identifying and partnering with the right private equity or joint venture group is essential. The two most important overarching considerations at this stage are your particular needs and your ultimate goals from a desired real estate partnership.
For example, perhaps you are only in need of some capital to execute a transaction, in which case you should look for a partner that can provide the necessary funds yet is not looking to assume additional responsibilities such as the development and management of the property.
It is also essential to find a partner that introduces a specialty that you lack, such as knowledge of a local market. The best collaborations serve to leverage the comparative advantages of each party in order to generate higher returns to scale than would otherwise be possible by working alone.
Structuring the Partnership
It is common for the members of a joint venture to form a limited liability company (LLC). At the time of formation, a joint venture agreement is created which outlines key provisions of the partnership, including management rights, how profits will be distributed, and an exit strategy with specified termination conditions in the event that one or more members of the agreement wish to leave the partnership in the future.
The joint venture agreement should also outline the amount, timing, and type of any fees that are to be paid out to contributing members of the partnership. For example, operating members may be entitled to some fees due to their work in managing a property. In such a case, fees could result from such services as acquisition, financing, property management, and development.
Waterfall provisions are customarily established to structure the distribution of profits and predefine the order in which contributing parties receive return on their capital, usually after any loans are paid off.
It goes without saying that fairness and transparency are key features of a partnership. The capital commitment and responsibilities of each party as well as any fees or investment allocation policies should be clear and fully disclosed in the initial set of agreements. There should also be an arbitration mechanism firmly establish at the same time so that the inevitable disputes that arise in the course of the project can be settled as amicably as possible.
The joint venture agreement should clearly detail how any future capital requirements are to be met based on the obligations of each party. While one-off transactions with no intention of further renovation or development may not necessitate any agreement concerning future capital contributions, additional funds will likely be required for projects involving the transformation or reclamation of a property. Each party should be aware well in advance of their obligations to support this further development.
It is also a good idea to draw a separation between the investment stage and allocation stage in regards to both timing and governance. This helps to ensure that the best interests of all parties are met based on their own goals for entering the arrangement.
How much capital each party will contribute to the joint venture and how responsibilities will be delineated should be clear at the time of agreement. This naturally results in a distribution of control over the project and any resulting profits.
The spheres of control may differ between the various members in a partnership, as an operating member will likely bear the responsibilities to locate, manage and arrange the finances for a property and contribute a smaller share of the total capital. The capital partner, meanwhile, will contribute a majority of the capital and therefore be entitled to control of the real estate portfolio according to the terms agreed-upon.
Fostering Working Relationships
If you are seeking a joint venture, it follows that you have certain needs that necessitate the foundation of a new business relationship. Whether you need more capital, technical expertise, local market knowledge, or some combination, it is helpful to allow the comparative advantages of each partner to guide the nature of the venture. These objectives should be clear and transparent to all parties so that no one later feels that they entered the agreement under false pretenses.
Management styles should also be a topic of attention from the early stages in a partnership, as they must be compatible for any joint venture to succeed. Cooperation and negotiation are required even for the smoothest running partnerships, and any imbalance in perceived motivation could be enough to throw the entire enterprise in jeopardy.
Regular face-to-face meetings are a great way to keep collaborations on track, as free and direct communication is essential to building and maintaining a high-quality working relationship. This also facilitates the sharing of information and the continual establishment of shared goals and performance metrics by which the partnership can be evaluated.
And while the goal of the partnership may involve financial incentives and increasing returns to scale made possible by pooled capital and expertise, the strength of the interpersonal connections between parties is vital to seeing the collaboration through to successful completion.
Methods of Collaboration
The finer details of a real estate venture depend significantly on the needs and goals of each party, so the first step is to define what kind of partnership is appropriate for a given situation. For example, perhaps there is only need to collaborate on one property, in which case a simple joint venture agreement will suffice.
Meanwhile, a productive relationship on one project may lead to interest in further collaboration, which may be best facilitated by the formation of an entirely separate joint venture business in which the partners all hold shares in the company.
There is a great deal of flexibility in collaborating on a real estate partnership, but it is essential to find a structure that defines roles, contributions, and allocation of profits to the satisfaction of all partners.
The keys to a successful real estate collaboration are defining your goals and needs in advance and establishing an open and honest line of communication with you business partners to foster the feeling that the project as a whole benefits from each party leveraging their respective comparative advantage. And even with all the financial details smoothed out to the satisfaction of each member, it takes concentrated effort to maintain a strong working relationship that can endure through any troubles or disputes later.
If you are in need of a joint venture equity partner, please do not hesitate to reach out to us at Black Collie Capital. We specialize in providing personalized financing solutions designed to suit your unique needs and look forward to working with you to see your business goals through to reality.