What is a Joint Venture?
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What is a real estate joint venture?
Many major real estate projects are financed as joint ventures. Most often, one partner brings the capital and the other partner brings the development and management expertise.
For example, if Boston-based ABC Corp owns a parcel of land in Miami it would like to develop, it could form a joint venture with Miami-based XYZ Development Corp to build a commercial shopping center.
ABC Corp provides the land and the capital; it’s considered the capital partner in the joint venture. XYZ Development Corp brings the skills to source, develop, and manage the project in Miami; it’s considered the operating partner.
Both ABC Corp and XYZ Corp are responsible for the profit and loss of the Miami joint venture, but only as they relate to this particular project. The partners’ other business interests are not liable for the new joint venture.
How is a real estate joint venture structured?
Although a joint venture is by definition a partnership, the new entity can take any legal structure. The most common structure is a limited liability corporation or LLC, but other structures—corporations, LLPs—are also used.
The legal structure is used to define the relationship between the operating partner and the capital partner:
- Who has ownership rights of the project
- How management responsibilities are delegated
- Capital contributions of the capital partner
- How profits will be allocated
- The exit mechanism for the partners
Elements of a Joint Venture Agreement
Although each JV agreement is unique, they all address the following key provisions:
Capital contributions of each member. The agreement specifies not only how much capital each partner will contribute, but also the timing of contributions. For example, one partner could contribute his 20% as “last money in,” when the project is nearing completion.
Responsibilities of the partners. The joint venture agreement lays out each partner’s obligations and responsibilities in the management of the project.
How profits will be distributed. This section lays out how and when compensation will be paid out. All partners may not get an equal share of the profits; joint ventures can have both active and passive partners.
How the JV pays taxes. The IRS doesn’t recognize a joint venture, so the agreement specifies how taxes will be paid. If the partners structure the joint venture as an LLC, it will pay taxes as an LLC. If the agreement is simply contractual between the two parties without a separate JV entity, it specifies how taxes will be divided and paid by the different partners.
How and when the joint venture will be dissolved. By specifying the mechanism for dissolution, the joint venture avoids extensive legal fees and costs. There are also usually provisions allowing for the premature dissolution of the entity by one or more partners.
What are the advantages of real estate joint ventures?
The main advantage lies in the complementarity of the joint venture relationship. The operating partner gets the necessary influx of capital to develop and manage a new project and the capital partner gets a good return on investment. Both parties can do together what they otherwise could not do on their own.
In addition, the JV structure also limits the financial liabilities of the partners and provides liquidation preference if the assets are liquidated.
Joint ventures are also useful for entering foreign markets. A real estate investor who wants to expand his portfolio in another country can form a joint venture with a local developer. This gets around the restrictions put in place by some countries prohibiting foreign development.