Most commercial real estate projects are purchased and developed by a single firm. Joint ventures work differently. Two or more parties work together in the funding and development stages for these ventures. Typically, the operating member has real estate experience, taking the lead on the project’s management. On the other side, the capital member works to provide funding for the deal. These allow parties to come together and combine their resources to develop a real estate project. Joint ventures and commercial real estate deals can benefit all parties. If you need assistance with a joint venture or commercial real estate deal, speak with a California law attorney at Polymath Legal PC by calling (833) 931-6418 or visiting the website for a consultation.
Real Estate Joint Venture Structures
According to the United States Small Business Association, a joint venture agreement must be made in writing, especially for those who want to bid on government contracts. In most situations, the capital and operating members set up the project as an independent limited liability company (LLC). Both parties enter into a joint venture agreement, which details the conditions of the project, such as:
- Capital member contribution
- Profit splitting
- Delegation of responsibilities
- Project ownership rights
- Exit strategies
Commercial real estate joint ventures are not limited to just LLCs defined by the Internal Revenue Service. Partners can set up joint ventures through corporations or partnerships. The structure depends on the relationship between the capital provider and the project operator.
Additionally, members may receive a larger share of the profits with specific fees. The joint venture agreement outlines these fees. The most common ones include:
- Acquisition Fee: Compensation for members for their time and effort to purchase the property
- Development Fee: Projects requiring significant construction can recover a percentage of those hard construction costs.
- Leasing and Property Management Fee: The operating members may handle property and leasing management. These fees reimburse them for those services.
- Asset Management Fee: This fee compensates the operating partner for developing financial strategies.
- Disposition Fee: Once again, the operating partner can receive reimbursement costs for managing the sale process.
Setting up these agreements and fees might seem complicated. Learn more about joint ventures and commercial real estate deals by speaking with an experienced California law attorney at Polymath Legal PC.
Commercial Real Estate Joint Venture Advantages
There can be numerous advantages to joint ventures and commercial real estate deals. These include:
Saving Time and Combining Resources
Joint venture business deals can move through the complicated legal and financial process with fewer individuals involved. Joint venture deals can be attractive for commercial properties that need an update or renovation before turning a profit.
Increasing Control
The party with the controlling interest in the joint venture reaps the project’s benefits. These individuals can decide how to use the money within the project. With crowdfunding or syndications, the investments are more passive than active.
Boosting Influence and Efficiency
All parties in a joint venture have more say about the types of investors in the project. They can vet partners to ensure they align with the other members’ objectives and goals. Joint ventures limit the time spent negotiating deals with those capital partners that will not fit the project’s principles.
Adapt To Market Conditions
Joint ventures allow for a quicker response to the current market. Those responses can be beneficial when the property requires an immediate acquisition.
Joint Venture Agreement Disadvantages
Along with the benefits, consider those disadvantages as well. They include:
Limited Investor Pool
With commercial real estate syndication, partner investment opportunities are open to those meeting the minimum requirements. Typically, joint ventures market to a smaller group of pre-qualified investors who have a vested interest in the project’s success.
Increased Responsibility
All partners in a joint venture are legally responsible for the property’s liabilities, meaning if something goes wrong, the partners are jointly liable. On the other hand, investing in real estate syndication offers liability protection as part of a limited partnership.
Complex Scenarios
Many individuals use a joint venture for commercial real estate because of its simplicity. However, these deals may become complex in the blink of an eye. While most partners can agree to terms and conditions, it only takes one rogue member to cause damage.
Time Consuming
Once a deal is accepted, closing the real estate joint venture moves quickly, but it takes time to find suitable investors to work as operating partners. Unless working with a massive network of investors, these joint ventures are not ideal for speedy deals.
Best Practices for Joint Ventures
While these deals can be rewarding, remember that there are risks. Without the proper planning, both parties may lose investment capital and be liable for damages. There are certain practices to use:
Take Time To Select a Partner
The commercial real estate deal can sink by selecting the wrong partner for a joint venture. All partners need to be on the same page regarding risk tolerance, ethical business practices, and timeliness. Along with that, a potential partner must show they have the experience and capital to complete the project.
Avoid Conflicts of Interest
The operations member tends to be the general contractor or property manager for the project. In turn, that help save a significant amount of work for the other partners. While the results focus on cost savings, it is often not beneficial for the investment’s performance. For example, the operational manager might not want to close on a deal if it means losing business for their property management company. Beware of any potential conflicts that could cause problems in the joint venture’s future.
Delegate Responsibilities
With a joint venture agreement, focus on delegating those responsibilities. Have a frank discussion with all potential partners about the expectations and obligations of the deal. In those situations, the partners can reduce any misunderstandings between the parties.
Contact an Experienced Joint Venture and Commercial Real Estate Attorney Today
Joint ventures and commercial real estate deals can provide plenty of benefits for all involved parties. However, everyone should practice due diligence to ensure the operating partner and capital member remain working towards the same goals. A little upfront work may prevent those headaches as the joint venture progresses. Learn about your commercial real estate options by speaking with a California law attorney at Polymath Legal PC at (833) 931-6418. Schedule a no-obligation consultation today.