It takes a highly skilled team of professionals with diversified experience and technical skills to make joint venture projects a reality. Aided by the latest technological advances, such a team is poised to take on projects of any size
in either the commercial or residential real estate sectors. However, a seasoned joint venture team will be concerned with the quality of the projects they develop and choose to limit the scope and number of projects which are in progress at any particular time.
Financial Leverage – The joint venture team should establish a good working relationship with a number of lending institutions which are willing to extend construction financing. These institutions will usually be interested
in securing the loans with the land and require that subordination agreements be executed. Upon completion of construction long term financing is obtained using a combination of land value and improvements as equity for the loan.
Liquidity – The nature of the Joint Venture project as determined by a feasibility study will dictate the liquidity of the venture. However, since Joint Venture projects are usually being developed as an investment property, it will have less liquidity and be subject to market conditions present at the time of the project’s completion.
Yield – Actual yields are dependent upon the financial structure of the project and Joint Venture agreement. Joint venture teams usually strive to maintain a profitable minimum pre-tax return on all projects that are undertaken. Usually a minimum 10% per annum and a 20% annualized return over the life of the project is usually targeted.
Risk – Investment in real estate involves a high degree of risk and isn’t suitable for all investors. By investing in a Joint Venture with a joint venture team, an investor is representing that they:
1) Understand the risks inherent in real estate investment and are financially able to withstand investment losses;
2) Have determined that real estate investment is suitable for them, considering their financial situation and investment objectives.
Development Strategy – The concept for developing a property through a joint venture requires equity partners to contribute 30% or more of total development cost to the project. A portion of these funds will be used to purchase the land, with the remainder being used towards overall development costs associated with the project.
NOTE: If a landowner is contributing land as their equity position, the landowner of the ground and the other equity partners will agree to the following:
1) The land owner must be willing to allow the developer adequate time to put the project together. The time varies, dependent upon the complexity of the project;
2) The land owner must be willing and financially capable of carrying the property and any debt that currently exists until the completion of the project;
3) The land owner must be willing to secure subordination agreements on any property debt, and provide the same;
4) The land owner must be willing to give partial releases as each phase is completed;
5) The developer will provide the necessary expertise and support to make the project successful.
The value that the developer will add to the project will include, but not be limited the following:
1) Promote the interests of the equity partners;
2) Analyze the proposed site and create a concept for development of the land;
3) Place signage on the land to promote the project;
4) Supervise the design and engineering of a site plan for the project;
5) Prepare promotional packets for zoning and marketing;
6) Initiate zoning talks with city/county;
7) Form an LLC for the Joint Venture;
8) Market the project for sale/lease depending upon the project;
9) Obtain construction financing;
10) Bid and let construction contracts;
11) Money and materials management;
12) Distribution of funds for expenses;
13) Obtaining permanent financing;
14) Distribution of proceeds.
In compensation for the contributions that each member of the Joint Venture brings to the organization the allocation of funds will normally be made in two stages. The first allocation will be yearly net proceeds, which will be distributed after the closing of books and accountants reconciliation at the end of the calendar year. The second allocation will usually occur after the sale of the project and the repayment of all debts associated with the project.
Yearly net proceeds distribution most often give the equity partner a priority distribution of year net profits up to 10% of their total capital contribution. If yearly net proceeds exceed 10% of total capital distribution, the equity
partner and developer often share in the remainder of the net proceeds equally (50:50).
Upon the sale of the project and before the dissolution of the Joint Venture, the second allocation of funds occurs. This distribution is made after the payment of all debts associated with the project to include but not be limited to permanent financing, the equity partner’s original capital contribution, operating costs, real estate commissions and closing costs. After all debts have been relieved, the net sale proceeds distribution will give the equity partner a priority distribution of the net sales proceeds up to 10% of their total capital contribution. If net sales proceeds exceed 10% of total capital distribution, the equity partner and developer will share in the remainder of the net sales proceeds equally (50:50).