Joint ventures are the business arrangements behind many commercial real estate development projects. Parties agree to work together to accomplish a specific project that might not be possible without their combined contributions.
As with other business endeavors, the more preparation and thought that goes into building a joint venture, the more likely a successful result can be achieved with a minimum of conflict and delay. A real estate and land use attorney can help partners get the right pieces in place to ensure the smooth development and operation of joint ventures in commercial real estate.
Use Due Diligence to Evaluate the Suitability of a Business Partner and Select the Appropriate Business Structure
You can avoid many potential problems when you make sure the partners are well aligned in goals and expectations for the project. It’s also crucial for all parties to be willing and able to meet their promised commitments. Ideal partners share both vision and values, have similar risk tolerance, and bring complementary skills and resources to the project.
Most commercial real estate joint ventures involve two primary parties. One party provides the real estate development expertise and the other party provides the money for the project. Each party may be its own business and will form a separate business entity to complete the project.
The type of business entity you select can impact decision-making and liability. Most commercial real estate joint ventures are set up as limited liability companies (LLC) because the LLC offers flexibility, doesn’t require a lot of administration, and limits the liability of members to only LLC assets. LLCs are not taxed by the IRS so income and losses pass through to the individual members and are taxed only once.
The Joint Venture Agreement Should Address Key Aspects of the Undertaking
The joint venture agreement is extremely important to the success of a commercial real estate joint venture. The following provisions need to be included in the agreement so the partners are clear about their rights and responsibilities and can resolve issues during the life of the project.
Purpose of the Joint Venture
Joint ventures are formed to accomplish a specific goal. Commercial real estate joint ventures may be organized to buy, develop, manage, and sell real estate assets. A clear statement of what the partners intend to accomplish and their expectations for the project is a way to ensure agreement and reduce misunderstandings.
Contributions and Ownership Interest
What will each partner contribute and what ownership share will each have? If the valuation of contributed assets could be difficult, deciding on a valuation method can avoid later disagreements. Will ownership interest be determined by the value of contributed assets or by some other method of determination?
Sharing of Profits and Losses
How profits and losses are to be shared is one of the most important provisions in the joint venture agreement. Typically, each partner’s share is described as a percentage corresponding to the ratio of a partner’s contribution to all contributions made by the partners. The method for calculating profits and losses should also be included, as these matters tend to become very contentious if not clearly set forth.
Operations Management and Decision-Making
Who will be in charge of the day-to-day operations and how will significant decisions be made? Governance is crucial to the efficient operation of the project and should include procedures for resolving conflict, mitigating risk, and promoting accountability.
Exit Terms
Exit terms allow a partner to leave the joint venture either at a specific time or date or for other reasons that trigger a partner’s ability to leave such as a change in ownership or a material contract breach. The options available for exiting should be described as well as the valuation method to be used.
Having a workable exit strategy gives the partners the flexibility to protect their business interests and minimize the risk to their investment when conditions change.
Conflict Resolution
Disputes are rarely avoidable, even under the best circumstances. Specifying a means for resolving issues that arise can minimize disruptions in operations, preserve working relationships, and prevent litigation. If the partners resolve their differences in good faith negotiations, requiring the conflict to be resolved by mediation or arbitration can lead to less costly and less adversarial resolutions.
A Successful Commercial Real Estate Joint Venture Is Not an Accident
Thorough preparation precedes success in commercial real estate joint ventures. Of course, there are no guarantees, but when venture participants have done their homework and legally protected their rights, they will have the best chance of obtaining what is desired from the business arrangement and avoiding unnecessary complications.
Wofsey Rosen is a Stamford, Connecticut law firm that handles commercial real estate matters including planning, acquiring, financing, managing, and development. If you need help putting together a commercial real estate development project, contact the experienced real estate and land use lawyers at Wofsey Rosen.