Choosing the wrong partner can sink a joint venture, while choosing the right one can help it skyrocket to success. To try to ensure that your joint venture partnership goes off without a hitch, you may want to consider following some of the best practices listed below:īe careful when selecting a partner. Without proper planning, a joint venture can easily be a sand-trap, in which one (or both) parties can lose valuable investment capital and even expose themselves to serious liability. While joint ventures can be extremely rewarding for all parties involved, they aren’t without their risks. Typically 1% of equity invested for each year of the project.ĭisposition Fee: The opposite of the acquisition fee, the disposition fee is paid to the operating partner to compensate them for their role in managing the property sale process. If this is the case, the operating member may be paid (albeit indirectly) as a result of the use of these services.Īsset Management Fee: Compensates the operating partner for managing the overall financial strategy of the investment property. Leasing and Property Management Fee: Leasing and property management are sometimes taken care of by an affiliate of the operating member. However, this fee is somewhat less common in today’s market.ĭevelopment Fee: If a project requires significant construction, an operating member will often be paid between 3 and 4% of hard construction costs in exchange for monitoring and managing the construction and development process. Acquisition fees are generally set at 1% of the property purchase price.įinancing Fee: Sourcing debt for a commercial real estate investment can be time intensive, so many operating members are paid a fee of 1% of all the debt they source for a project. Common fees include:Īcquisition Fee: Operating members put a lot of time and effort into purchasing the property itself, and this fee compensates them for that. Like the other information mentioned above, the exact nature of these fees should be detailed in the joint venture agreement. In addition to generally receiving a larger share of the profits through a promote, the operating member of a joint venture will often be rewarded for their work via certain fees. However, having certain structures in place may be able to reduce risk and prevent a bad situation from getting worse. For instance, if the operating partner has a significant ownership stake, the capital partner may have the right to buy his stake after a certain period.Įxit strategies: The exit strategy should detail the estimated timeline for the project exit, how it will be done, and under which circumstances a party can exit the agreement early.Ĭontingencies and how various emergencies will be handled: Natural disasters, ‘acts of God’, lawsuits and other unforeseen events can easily derail a real estate investment or development project.
Long-term ownership rights: The agreement should also detail who will be able to own the property after the primary investment period is over. In addition, the operational partner will typically be awarded certain fees, which we’ll get into a bit later. They will often be compensated in the form of a waterfall/promote structure, in which they will receive a proportionally larger share of the profits (called a promote) should the project exceed certain profitability hurdles.
In many situations, the operating partner will take in a larger share of the profits due to their additional management responsibilities. Profit splits/management responsibilities: The agreement should detail exactly how profits are split. In addition, the joint venture agreement should clearly state if the venture plans to take out a commercial real estate loan, and, if so, for how much. However, in some cases, the operational partner will not contribute anything, while the capital partner contributes 100% of the required capital.
How much each party will contribute to the venture: In most cases, a capital partner or partner(s) will contribute the majority of the capital to a project, while the operational partner will contribute a smaller stake. The plans and goals of the joint venture: This part of the agreement should detail the property that the JV plans to develop/acquire, and how will they do it. In addition to determining what type of corporate or partnership structure a project should have, the partners will also need to agree upon and sign a joint venture agreement. The Importance of Joint Venture Agreements
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