Real estate can be a tricky business. It’s constantly changing and evolving and it’s important for you to stay ahead of the curve. After all, homes are some of the largest and most rewarding investments that you can make. They’re also some of the most daunting, and that tends to derail many from getting into the market.
RealtyWW makes it our mission to ensure that buying, selling, leasing and renting are as easy as possible. Part of that is building out a blog with partners like House Design Solutions, whose values are aligned with ours. House Design Solutions believes in equipping its customer community with knowledge, because they can then make the decisions that allow them to feel comfortable and in the driver’s seat. Today, we’re partnering to dive into real estate joint ventures.
Read on for more information:
Joint ventures can be as simple as they sound; a partnership between companies, partners or even individual investors that benefit all parties involved. You’re looking to match the capital for any acquisition.
Let’s start with some key players. The operating member is looking for capital. The capital member provides the money. Important clarification, the capital member does NOT source and operate the real estate assets, they just help with the acquisition process.
Capital members want to get involved in joint ventures with the best experts in the business – someone or a team that knows what markets look like around the world – their history, their evolution and basically the strategy of how to make the best return-on-investment.
Since the operating member will really be the one overseeing items like reporting and day-to-day duties, this relationship is really important to research and then make an informed decision.
The capital member wants the operating member to lead everything from debt finance and property development to maintenance and oversight.
HOW DOES IT WORK?
We’ve talked about those that need to be involved and the roles that they play. Now let’s get into the process. A successful joint venture is structured with a new limited liability company that includes the operating member and the capital member. Once that’s completed, it’s time to enter into an operating agreement.
In general, this is referred to by industry experts as a joint venture agreement. This covers off liabilities for any party involved. It includes a couple of different pieces. You want to include the distribution of profits, who is managing, who has ultimate control over decisions and an exit plan, should either party choose to terminate the contract.
There are examples all over the Web that include both Limited Liability Company Operating Agreement and Joint Venture Organizational Chart.
Capital contribution is obviously going to be an important and potentially extensive part of the planning. Look at it as a basic business transaction between multiple parties, but there are industry-standard formulas that will begin to look familiar if this is an adventure on which you embark.
According to LexisNexis, “Some typical formulations for initial capital contributions can be 95%/5% or 90%/10%, where the operating member of the joint venture contributes a minor portion (5%–10%) of the equity capital and the other member provides most of the equity capital. A 50%/50% formulation is not uncommon where the operating member has sufficient capital and wants to retain more control and a larger share of the economics of the deal.”
The other side of any other successful investment is the aforementioned list of duties. This can be very specific to the type of real estate that’s being purchased and need to be aligned on, in advance of signing any papers.
ITEMS TO KEEP IN MIND:
As many a wise man and woman have shared, the things that are the hardest to work for will most likely be the most satisfying to obtain. That can certainly be the case in any joint venture agreement for property development. That being said, RealtyWW and House Design Solutions couldn’t be larger proponents of going into any decision with all of the information, so there are key issues to consider, especially as you draft a capital contribution provision:
- Question number one – Can the operating member or capital member make capital calls on their own or do all party members need to be in sync and in that case, how are you best communicating?
- Next on deck – How do additional capital contributions work? What if the operating member or the capital member wants to contribute more? Do they own more and have more input on decisions? Conversely, what if one of the party members wants to contribute less. These are important conversations to have right off of the bat.
- Finally – What does the interest rate strategy look like? Unfortunately, not all business agreements end well. And that’s okay. Interest rates are a successful incentive to ensure that all parties are responsible and held accountable for payments and the overall investment. If one party reneges on a payment or the cadence of planned payments, having stipulations like interest rates in place is a good safety measure.
There are resources to answer all of the above and move forward in developing your dream home, thanks to the support of a joint venture agreement.
Questions? Comments? Do let us know.
May 16, 2019