In a previous article we’ve discussed real estate syndications and some of its benefits. Here we’ll look at what is a Joint Venture (JV) in real estate.
Joint Venture vs Syndication
Both real estate joint ventures and real estate syndications provide ways of pooling resources and investments to undertake a real estate project. But they differ in their structure, participants, and management.
Structure, Participants and Management
With a joint venture, a partnership is created between two or more parties. The parties involved could include individuals, companies, developers, investors or even property managers. Each party contributes different elements to the joint venture. For example, capital, expertise or resources to undertake the venture. The benefit of doing this resides in the combined strengths of the group and the minimization of individual risks and costs associated with the venture. As a side note, joint ventures are distinctly different from partnerships. In that, each of the partners remain independent and they do not operate (collectively) under one entity. Rather, the joint venture partners simply work together under a contractual arrangement on the specific deals or projects.
Typically, joint ventures involve a smaller group of participants vs that of a syndication. You also have a closer relationship with each other and are all participants in the day to day decision-making process.
The joint venture agreement outlines the terms and conditions of the collaboration, including the responsibilities, rights, and obligations of each party, profit sharing arrangements, decision-making processes and the duration of the partnership. The agreement also addresses important factors such as project management, risk allocation, dispute resolution mechanisms and exit strategies.
As mentioned above, the pooling of resources (capital and expertise), reductions of risks and costs are some of the benefits of a joint venture arrangement. However, there are drawbacks that should be mentioned to assist in deciding if this is right for you. We’ll discuss these in a little more detail below.
Drawbacks of a Joint Venture
One of the main challenges of a JV arrangement relates to the shared control and decision-making. This can have an impact on how quickly decision are made and can create conflicts between partners due to differences of opinions.
Another downfall you can encounter is, if one partner believes his/her contribution outweighs those of the other(s). This can lead to a breakdown of relations and impact the profitable operations of the venture.
A third negative consequence of JVs and one you should pay attention to, is its termination. Indeed you can leave a JV but it often requires advanced notice and obtaining approval of the other JV members. You also run the risk of the intellectual property rights of the JV being shared or used against the partnership on exit of a JV member. It is in this regard that most JV arrangements include a non compete clause within the agreement.
Conclusion
In order to mitigate any potential issues surrounding any arrangement, each party should conduct thorough research into the venture and its members. You should then engage with a competent legal counsel to negotiate clear terms of the agreement and foster open communications to ensure a successful and mutually beneficial arrangement.